Paper #1284

Title:

Risk sharing with the monarch: Excusable defaults and contingent debt in the age of Philip II, 1556-1598

Authors:

Maurizio Drelichman and Joachim Voth

Date:

June 2011 (Revised: October 2013)

Abstract:

Contingent sovereign debt can create important welfare gains. Nonetheless, there is almost no issuance today. Using hand-collected archival data, we examine the first known case of large-scale use of state-contingent sovereign debt in history. Philip II of Spain entered into hundreds of contracts whose value and due date depended on verifiable, exogenous events such as the arrival of silver fleets. We show that this allowed for effective risk-sharing between the king and his bankers. The existence of statecontingent debt also sheds light on the nature of defaults – they were simply contingencies over which Crown and bankers had not contracted previously.

Keywords:

sovereign debt, syndication, diversification, risk transfer, Spain

JEL codes:

F34, G15, N23

Area of Research:

Economic and Business History / Macroeconomics and International Economics

Published in:

Cliometrica, forthcoming

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