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

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)

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Date Written: August 4, 2009

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.

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 (August 4, 2009). The Economic Journal 121(557), 2011: 1205-1227.. Available at SSRN: https://ssrn.com/abstract=1443738

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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