Paper #1262

Title:

Serial defaults, serial profits: Returns to sovereign lending in Habsburg Spain, 1566-1600

Authors:

Mauricio Drelichman and Joachim Voth

Date:

January 2011

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. © 2010 Elsevier Inc. All rights reserved.

Keywords:

Sovereign debt, Serial default, Rate of return, Profitability, Spain

JEL codes:

N23, F34, G12

Area of Research:

Economic and Business History

Published in:

Explorations in Economic History, January 2011, 48 (1), pp. 1-19. Explorations Prize for best article published in "Economic History" in 2010/11

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