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Lending to the borrower from hell: Debt and default in the age of Philip II, 1556-1598

  • Mauricio Drelichman
  • Joachim Voth

What sustained borrowing without third-party enforcement, in the early days of sovereign lending? Philip II of Spain accumulated towering debts while stopping all payments to his lenders four times. How could the sovereign borrow much and default often? We argue that bankers’ ability to cut off Philip II’s access to smoothing services was key. A form of syndicated lending created cohesion among his Genoese bankers. As a result, lending moratoria were sustained through a ‘cheat the cheater’ mechanism (Kletzer and Wright, 2000). Our paper thus lends empirical support to a recent literature emphasizing the role of bankers’ incentives for continued sovereign borrowing.

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File URL: http://www.econ.upf.edu/docs/papers/downloads/1164.pdf
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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1164.

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Date of creation: Dec 2007
Date of revision: Nov 2009
Handle: RePEc:upf:upfgen:1164
Contact details of provider: Web page: http://www.econ.upf.edu/

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