Lending to the Borrower from Hell: Debt and Default in the Age of Philip II
The Economic Journal 121(557), 2011: 1205-1227.
47 Pages Posted: 4 Aug 2009 Last revised: 10 Oct 2012
Date Written: August 4, 2009
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.
Keywords: Early modern state finances, incentive compatability, Philip II, serial default, sovereign debt, state capacity
JEL Classification: F21, F34, N23
Suggested Citation: Suggested Citation