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

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  • Mauricio Drelichman
  • Joachim Voth

Abstract

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.

Suggested Citation

  • Mauricio Drelichman & Joachim Voth, 2007. "Lending to the borrower from hell: Debt and default in the age of Philip II, 1556-1598," Economics Working Papers 1164, Department of Economics and Business, Universitat Pompeu Fabra, revised Nov 2009.
  • Handle: RePEc:upf:upfgen:1164
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    Cited by:

    1. Dhillon Amrita, & García-Fronti Javier & Zhang Lei, 2009. "Sovereign Debt Default : The Impact of Creditor Composition," The Warwick Economics Research Paper Series (TWERPS) 901, University of Warwick, Department of Economics.
    2. Garcia, Daniel, 2016. "A Pound of Flesh for the King," MPRA Paper 73266, University Library of Munich, Germany.
    3. Lorenzo Bini Smaghi, 2013. "Sovereign Risk," Chapters,in: Stability of the Financial System, chapter 10 Edward Elgar Publishing.
    4. Yves Balasko & Enrique Kawamura, 2010. "Pareto-Improving Defaul," Working Papers 102, Universidad de San Andres, Departamento de Economia, revised May 2010.

    More about this item

    Keywords

    Early modern state finances; incentive compatability; Philip II; serial default; sovereign debt; state capacity;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913

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