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

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 wh...

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Bibliographic Details
Published inCliometrica Vol. 9; no. 1; pp. 49 - 75
Main Authors Drelichman, Mauricio, Voth, Hans-Joachim
Format Journal Article
LanguageEnglish
Published Berlin/Heidelberg Springer Berlin Heidelberg 01.01.2015
Springer Nature B.V
Subjects
16th century
Borrowing
Consumption
Default
Econometrics
Economic conditions
Economic development
Economic history
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Economics and Finance
Finance
History
History of Economic Thought/Methodology
Insurance
Management
Original Paper
Political power
Risk sharing
Royalty
Sanctions
Sovereign debt
Statistics for Business
Studies
Spain
Excusable default
H63
F34
G12
Contingent lending
Sovereign debt
N23
Spain
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Summary: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 state-contingent debt also sheds light on the nature of defaults—they were simply contingencies over which Crown and bankers had not contracted previously.
ISSN:1863-2505
1863-2513
DOI:10.1007/s11698-014-0108-8