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

Mauricio Drelichman and Hans-Joachim Voth

Economics working papers from Vancouver School of Economics

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: sovereing debt; syndication; diversification; Spain; Genoa (search for similar items in EconPapers)
Pages: 24 pages
Date: 2011-07-06, Revised 2011-07-06
New Economics Papers: this item is included in nep-his and nep-ifn
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Citations: View citations in EconPapers (2)

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