Lending to the Borrower from Hell: Debt and Default in the Age of Philip II, 1556-1598

Hans-Joachim Voth and Mauricio Drelichman

No 7276, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Philip II of Spain accumulated debts equivalent to 60% of GDP. He also failed to honor them four times. We ask what allowed the sovereign to borrow much while defaulting often. Earlier work emphasized either banker irrationality or the importance of sanctions. Using new archival data, we show that neither interpretation is supported by the evidence. What sustained lending was the ability of bankers to cut off Philip II?s access to smoothing services. We analyze the incentive structure that supported the cohesion of this bankers' coalition. Lending moratoria were sustained through a "cheat the cheater" mechanism (Kletzer and Wright, 2000).

Keywords: Sovereign debt; Serial default; Early modern state finances; Philip ii; State capacity; Incentive compatability (search for similar items in EconPapers)
JEL-codes: F21 F34 N23 (search for similar items in EconPapers)
Date: 2009-04
New Economics Papers: this item is included in nep-his
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Citations: View citations in EconPapers (3)

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Working Paper: Lending to the borrower from hell: Debt and default in the age of Philip II, 1556-1598 (2009)
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