DP7276 Lending to the Borrower from Hell: Debt and Default in the Age of Philip II, 1556-1598
|Author(s):||Mauricio Drelichman, Hans-Joachim Voth|
|Publication Date:||April 2009|
|Keyword(s):||early modern state finances, incentive compatability, Philip II, serial default, sovereign debt, state capacity|
|JEL(s):||F21, F34, N23|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=7276|
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).