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Serial defaults, serial profits: Returns to sovereign lending in Habsburg Spain, 1566-1600

  • Mauricio Drelichman
  • Joachim Voth

Philip II of Spain accumulated debts equivalent to 60% of GDP. He also defaulted four times on his short-term loans, thus becoming the first serial defaulter in history. Contrary to a common view in the literature, we show that lending to the king was profitable even under worst-case scenario assumptions. Lenders maintained long-term relationships with the crown. Losses sustained during defaults were more than compensated by profits in normal times. Defaults were not catastrophic events. In effect, short-term lending acted as an insurance mechanism, allowing the king to reduce his payments in harsh times in exchange for paying a premium in tranquil periods. © 2010 Elsevier Inc. All rights reserved.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1262.

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Date of creation: Jan 2011
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Handle: RePEc:upf:upfgen:1262
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