Citation

Discussion Paper Details

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

Author(s): Mauricio Drelichman and Hans-Joachim Voth

Publication Date: April 2009

Keyword(s): early modern state finances, incentive compatability, Philip II, serial default, sovereign debt and state capacity

Programme Area(s): International Macroeconomics

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).

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Bibliographic Reference

Drelichman, M and Voth, H. 2009. 'Lending to the Borrower from Hell: Debt and Default in the Age of Philip II, 1556-1598'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7276