Lending to the Borrower from Hell: Debt and Default in the Age of Philip II, 1556-1598

44 Pages Posted: 19 May 2009

See all articles by Mauricio Drelichman

Mauricio Drelichman

University of British Columbia (UBC) - Department of Economics; Canadian Institute for Advanced Research (CIFAR)

Hans-Joachim Voth

University of Zurich - UBS International Center of Economics in Society; Centre for Economic Policy Research (CEPR)

Date Written: April 2009

Abstract

Philip II of Spain accumulated debts equivalent to 60% of GDP. He also failed to honor them four times. We ask what allowed the sovereign to borrow much while defaulting often. Earlier work emphasized either banker irrationality or the importance of sanctions. Using new archival data, we show that neither interpretation is supported by the evidence. What sustained lending was the ability of bankers to cut off Philip II's access to smoothing services. We analyze the incentive structure that supported the cohesion of this bankers' coalition. Lending moratoria were sustained through a "cheat the cheater" mechanism (Kletzer and Wright, 2000).

Keywords: early modern state finances, incentive compatability, Philip II, serial default, sovereign debt, state capacity

JEL Classification: F21, F34, N23

Suggested Citation

Drelichman, Mauricio and Voth, Hans-Joachim, Lending to the Borrower from Hell: Debt and Default in the Age of Philip II, 1556-1598 (April 2009). CEPR Discussion Paper No. DP7276. Available at SSRN: https://ssrn.com/abstract=1405073

Mauricio Drelichman

University of British Columbia (UBC) - Department of Economics ( email )

997-1873 East Mall
Vancouver, BC V6T 1Z1
Canada

Canadian Institute for Advanced Research (CIFAR) ( email )

180 Dundas Street West, Suite 1400
Toronto, Ontario
Canada

Hans-Joachim Voth (Contact Author)

University of Zurich - UBS International Center of Economics in Society ( email )

Raemistrasse 71
Zuerich, 8006
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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