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Lending to the borrower from hell: Debt and default in the age of Philip II, 1556-1598
Drelichman, Mauricio; Voth, Joachim
Universitat Pompeu Fabra. Departament d'Economia i Empresa
What sustained borrowing without third-party enforcement, in the early days of sovereignlending? Philip II of Spain accumulated towering debts while stopping all payments tohis lenders four times. How could the sovereign borrow much and default often? Weargue that bankers ability to cut off Philip II s access to smoothing services was key. Aform of syndicated lending created cohesion among his Genoese bankers. As a result,lending moratoria were sustained through a cheat the cheater mechanism (Kletzer andWright, 2000). Our paper thus lends empirical support to a recent literature emphasizingthe role of bankers incentives for continued sovereign borrowing.
Economic and Business History
early modern state finances
incentive compatability
philip ii
serial default
sovereign debt
state capacity
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