Risk Sharing with the Monarch: Contingent Debt and Excusable Defaults in the Age of Philip II, 1556–1598

University of Zurich, Department of Economics, Working Paper No. 145

42 Pages Posted: 28 Mar 2014

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)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2014

Abstract

Contingent sovereign debt can create important welfare gains. Nonetheless, there is almost no issuance today. Using hand-collected archival data, we examine the first known case of large-scale use of state-contingent sovereign debt in history. Philip II of Spain entered into hundreds of contracts whose value and due date depended on verifiable, exogenous events such as the arrival of silver fleets. We show that this allowed for effective risk-sharing between the king and his bankers. The existence of state contingent debt also sheds light on the nature of defaults – they were simply contingencies over which Crown and bankers had not contracted previously.

Keywords: Sovereign debt, contingent debt, fiscal policy, debt crisis

JEL Classification: H1, H63, N43

Suggested Citation

Drelichman, Mauricio and Voth, Hans-Joachim, Risk Sharing with the Monarch: Contingent Debt and Excusable Defaults in the Age of Philip II, 1556–1598 (March 2014). University of Zurich, Department of Economics, Working Paper No. 145. Available at SSRN: https://ssrn.com/abstract=2416421 or http://dx.doi.org/10.2139/ssrn.2416421

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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