Funding Empire: Risk, Diversification, and the Underwriting of Early Modern Sovereign Loans

27 Pages Posted: 8 Jul 2011

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: July 6, 2011

Abstract

Lending to early modern monarchs could be very profitable, yet highly risky. International financiers unlocked the excess returns in sovereign debt markets by parceling out the risk and transferring it to downstream investors in exchange for financial intermediation fees. We link two sovereign loans to Philip II of Spain to a downstream Genoese partnership. After examining the performance of the loans through the 1596 bankruptcy and its ensuing settlement, we conclude that the risk diversification scheme used by international bankers worked. Shares in sovereign loans were held within highly diversified portfolios, enhancing their returns in normal times and not posing excessive risks when caught in a default.

Keywords: sovereign debt, syndication, diversification, Spain, Genoa

JEL Classification: F34, N23

Suggested Citation

Drelichman, Mauricio and Voth, Hans-Joachim, Funding Empire: Risk, Diversification, and the Underwriting of Early Modern Sovereign Loans (July 6, 2011). Available at SSRN: https://ssrn.com/abstract=1880092 or http://dx.doi.org/10.2139/ssrn.1880092

Mauricio Drelichman (Contact Author)

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

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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