Lending to the Borrower from Hell: Debt, Taxes, and Default in the Age of Philip II (The Princeton Economic History of the Western World Book 47)

Why do lenders time and again loan money to sovereign borrowers who promptly go bankrupt? When can this type of lending work? As the United States and many European nations struggle with mountains of debt, historical precedents can offer valuable insights. __Lending to the Borrower from Hell__ looks at one famous case--the debts and defaults of Philip II of Spain. Ruling over one of the largest and most powerful empires in history, King Philip defaulted four times. Yet he never lost access to capital markets and could borrow again within a year or two of each default. Exploring the shrewd reasoning of the lenders who continued to offer money, Mauricio Drelichman and Hans-Joachim Voth analyze the lessons from this important historical example. Using detailed new evidence collected from sixteenth-century archives, Drelichman and Voth examine the incentives and returns of lenders. They provide powerful evidence that in the right situations, lenders not only survive despite defaults--they thrive. Drelichman and Voth also demonstrate that debt markets cope well, despite massive fluctuations in expenditure and revenue, when lending functions like insurance. The authors unearth unique sixteenth-century loan contracts that offered highly effective risk sharing between the king and his lenders, with payment obligations reduced in bad times. A fascinating story of finance and empire, __Lending to the Borrower from Hell__ offers an intelligent model for keeping economies safe in times of sovereign debt crises and defaults. Why Do Lenders Time And Again Loan Money To Sovereign Borrowers Who Promptly Go Bankrupt? When Can This Type Of Lending Work? As The United States And Many European Nations Struggle With Mountains Of Debt, Historical Precedents Can Offer Valuable Insights. Lending To The Borrower From Hell Looks At One Famous Case--the Debts And Defaults Of Philip Ii Of Spain. Ruling Over One Of The Largest And Most Powerful Empires In History, King Philip Defaulted Four Times. Yet He Never Lost Access To Capital Markets And Could Borrow Again Within A Year Or Two Of Each Default. Exploring The Shrewd Reasoning Of The Lenders Who Continued To Offer Money, Mauricio Drelichman And Hans-joachim Voth Analyze The Lessons From This Important Historical Example.using Detailed New Evidence Collected From Sixteenth-century Archives, Drelichman And Voth Examine The Incentives And Returns Of Lenders. They Provide Powerful Evidence That In The Right Situations, Lenders Not Only Survive Despite Defaults--they Thrive. Drelichman And Voth Also Demonstrate That Debt Markets Cope Well, Despite Massive Fluctuations In Expenditure And Revenue, When Lending Functions Like Insurance. The Authors Unearth Unique Sixteenth-century Loan Contracts That Offered Highly Effective Risk Sharing Between The King And His Lenders, With Payment Obligations Reduced In Bad Times.a Fascinating Story Of Finance And Empire, Lending To The Borrower From Hell Offers An Intelligent Model For Keeping Economies Safe In Times Of Sovereign Debt Crises And Defaults-- Chapter 1 Lending To The Sound Of Cannon -- Chapter 2 Philip's Empire -- Chapter 3 Taxes, Debts, And Institutions -- Chapter 4 The Sustainable Debts Of Philip Ii -- Chapter 5 Lending To The Borrower From Hell -- Chapter 6 Serial Defaults, Serial Profits -- Chapter 7 Risk Sharing With The Monarch -- Chapter 8 Tax, Empire, And The Logic Of Spanish Decline -- Epilogue Financial Folly And Spain's Black Legend. Mauricio Drelichman And Hans-joachim Voth. Includes Bibliographical References And Index. A thoroughly enjoyable economic history book with great relevance for the present debate on sovereign borrowing., Diane Coyle, Enlightened Economist"Sovereign debt is a paradox: why lend to a ruler who can summarily change the terms and conditions under which he repays? This is a deep question on which only history, ultimately, can shed light. Drelichman and Voth do the history right in this detailed, rigorous study of the notorious serial defaulter Philip II.", Barry Eichengreen, University of California, Berkeley"Drelichman and Voth delve into old Spanish archives to bring out a compelling story of power and profit in imperial finance. Using modern economic analysis, they offer a deeper understanding of the problems of sovereign debt and default, from the sixteenth-century world of King Philip II to our own world today.", Roger Myerson, University of Chicago and Nobel Laureate in Economics"Combining a massive reconstruction of Philip II's dealings with his creditors with elegant lessons from economics, this important book gives readers a new understanding of a key moment in European history. Demonstrating that neither the king nor his creditors were irrational, Drelichman and Voth show how extremely sophisticated contracts provided Philip with expensive but dearly needed funds, while offering bankers a panoply of mechanisms for fund recovery.", Jean-Laurent Rosenthal, California Institute of Technology"Drelichman and Voth masterfully tell the story of state-contingent sovereign debt during the reign of Philip II of Spain. Their narrative is elegant, the analysis is compelling, and the data they've collected are simply amazing.", Kenneth A. Shepsle, Harvard University"The fruit of long, intense original research, this convincing book revises the standard histories of public credit and imperial Spain.", Larry D. Neal, professor emeritus of economics, University of Illinois at Urbana-Cha What the loans and defaults of a sixteenth-century Spanish king can tell us about sovereign debt today Why do lenders time and again loan money to sovereign borrowers who promptly go bankrupt? When can this type of lending work? As the United States and many European nations struggle with mountains of debt, historical precedents can offer valuable insights. Lending to the Borrower from Hell looks at one famous case—the debts and defaults of Philip II of Spain. Ruling over one of the largest and most powerful empires in history, King Philip defaulted four times. Yet he never lost access to capital markets and could borrow again within a year or two of each default. Exploring the shrewd reasoning of the lenders who continued to offer money, Mauricio Drelichman and Hans-Joachim Voth analyze the lessons from this important historical example. Using detailed new evidence collected from sixteenth-century archives, Drelichman and Voth examine the incentives and returns of lenders. They provide powerful evidence that in the right situations, lenders not only survive despite defaults—they thrive. Drelichman and Voth also demonstrate that debt markets cope well, despite massive fluctuations in expenditure and revenue, when lending functions like insurance. The authors unearth unique sixteenth-century loan contracts that offered highly effective risk sharing between the king and his lenders, with payment obligations reduced in bad times. A fascinating story of finance and empire, Lending to the Borrower from Hell offers an intelligent model for keeping economies safe in times of sovereign debt crises and defaults. "Why do lenders time and again loan money to sovereign borrowers who promptly go bankrupt? When can this type of lending work? As the United States and many European nations struggle with mountains of debt, historical precedents can offer valuable insights. Lending to the Borrower from Hell looks at one famous case--the debts and defaults of Philip II of Spain. Ruling over one of the largest and most powerful empires in history, King Philip defaulted four times. Yet he never lost access to capital markets and could borrow again within a year or two of each default. Exploring the shrewd reasoning of the lenders who continued to offer money, Mauricio Drelichman and Hans-Joachim Voth analyze the lessons from this important historical example. Using detailed new evidence collected from sixteenth-century archives, Drelichman and Voth examine the incentives and returns of lenders. They provide powerful evidence that in the right situations, lenders not only survive despite defaults--they thrive. Drelichman and Voth also demonstrate that debt markets cope well, despite massive fluctuations in expenditure and revenue, when lending functions like insurance. The authors unearth unique sixteenth-century loan contracts that offered highly effective risk sharing between the king and his lenders, with payment obligations reduced in bad times. A fascinating story of finance and empire, Lending to the Borrower from Hell offers an intelligent model for keeping economies safe in times of sovereign debt crises and defaults"-- Provided by publisher Content: ACKNOWLEDGEMENTS ix PROLOGUE 1 CHAPTER 1 Lending to the Sound of Cannon 9 CHAPTER 2 Philip's Empire 45 CHAPTER 3 Taxes, Debts, and Institutions 74 CHAPTER 4 The Sustainable Debts of Philip II 105 CHAPTER 5 Lending to the Borrower from Hell 132 CHAPTER 6 Serial Defaults, Serial Profits 173 CHAPTER 7 Risk Sharing with the Monarch 211 CHAPTER 8 Tax, Empire, and the Logic of Spanish Decline 243 EPILOGUE Financial Folly and Spain's Black Legend 271 REFERENCES 281 INDEX 297