PDF Ebook Lending To The Borrower From Hell: Debt And Default In The Age of Philip Ii, 1556–159
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. Making loans in overlapping coalitions, the Genoese acted in unison in times of crisis. Lending moratoria were enforced through a “cheat the cheater” mechanism (Kletzer and Wright, 2000). Thus, market power and reputational concerns were sufficient to sustain lending under conditions of anarchy.
What sustains sovereign borrowing? One important school of thought argues that, in the absence of borrower commitment, punishment mechanisms outside the lending transaction itself are necessary to make governments pay.1 Other authors have emphasized the importance of reputation and the need for inter temporal smoothing.2 A recent literature focuses on the importance of coordination, incentive structures, and market power between lenders (Kletzer and Wright 2000; Wright 2002; Kovrijnykh and Szentes 2007).3 In this paper, we examine one of the most famous historical cases at the dawn of sovereign borrowing in an attempt to decide which mechanism was responsible for sustained lending.
Philip II ruled from 1556 to 1598. During his reign, the Spanish Empire was at the height of its power. Spain fought numerous wars against France, Dutch rebels, the English, and the Ottomans. It conquered the Philippines and acquired Portugal and its overseas possessions. Earlier princes had borrowed abroad, but Philip II was the first to accumulate debts similar to those of modern states, borrowing approximately 60% of national product. He also became the first serial defaulter in history, declaring payment stops no less than four times during his reign. Eventually, Spain went on to become the record holder for repeated defaults, reneging no fewer than 13 times on its obligations.4 We ask how the king could accumulate massive debts while defaulting so often.
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PDF Ebook Lending To The Borrower From Hell: Debt And Default In The Age of Philip Ii, 1556–159
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