Lending to the Borrower from Hell: Debt and Default in the Age of Philip II

23 Pages Posted: 3 Dec 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

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Date Written: December 2011

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. Our article thus lends empirical support to a recent literature that emphasises the role of bankers’ incentives for continued sovereign borrowing.

Suggested Citation

Drelichman, Mauricio and Voth, Hans‐Joachim, Lending to the Borrower from Hell: Debt and Default in the Age of Philip II (December 2011). The Economic Journal, Vol. 121, Issue 557, pp. 1205-1227, 2011. Available at SSRN: https://ssrn.com/abstract=1967345 or http://dx.doi.org/10.1111/j.1468-0297.2011.02442.x

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

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