Serial defaults, serial profits: Returns to sovereign lending in Habsburg Spain, 1566–1600 |
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Authors: | Mauricio Drelichman Hans-Joachim Voth |
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Institution: | aThe University of British Columbia, Canada;bCIFAR, Canada;cICREA/Universitat Pompeu Fabra, Spain;dCREI, Spain |
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Abstract: | Philip II of Spain accumulated debts equivalent to 60% of GDP. He also defaulted four times on his short-term loans, thus becoming the first serial defaulter in history. Contrary to a common view in the literature, we show that lending to the king was profitable even under worst-case scenario assumptions. Lenders maintained long-term relationships with the crown. Losses sustained during defaults were more than compensated by profits in normal times. Defaults were not catastrophic events. In effect, short-term lending acted as an insurance mechanism, allowing the king to reduce his payments in harsh times in exchange for paying a premium in tranquil periods. |
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Keywords: | JEL classification: N23 F34 G12 |
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