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Lending to the Borrower from Hell: Debt and Default in the Age of Philip II


  •  Corresponding author: Hans-Joachim Voth, ICREA and DEE-UPF, c/Ramon Trias Fargas 25–27, 08005 Barcelona, Spain. Email:

  • We thank Fernando Broner, Oscar Gelderblom, Avner Greif, Phil Hoffman, Hugo Hopenhayn, Ken Kletzer, Michael Kremer, Andreu Mas-Colell, Jean-Laurent Rosenthal, Moritz Schularick, Chris Sims, David Stasavage, Richard Sylla, Jaume Ventura, Mark Wright and Jeromin Zettelmeyer as well as seminar participants at Caltech, NYU-Stern, Stanford, Berkeley, UCLA, UC Davis, Carlos III, UBC, Humboldt, UPF, the 2008 Canadian Network for Economic History Conference, the CREI-CEPR Conference on Sovereign Risk, the Utrecht Finance and History Conference, and the PSE History of Public Finances workshop. We also thank Marcos Agurto, Hans-Christian Boy, Diego Pereira Garmendía, Germán Pupato, Javier Torres, Cristian Troncoso and Anthony Wray for research assistance. Financial support from SSHRCC, the UBC Hampton Fund, the Barcelona GSE and MEC is gratefully acknowledged.


What sustained borrowing without third-party enforcement in the early days of sovereign lending? Philip II of Spain accumulated towering debts while stopping all payments to his lenders four times. How could the sovereign borrow much and default often? We argue that bankers’ ability to cut off Philip II’s access to smoothing services was key. A form of syndicated lending created cohesion among his Genoese bankers. As a result, lending moratoria were sustained through a ‘cheat-the-cheater’ mechanism. Our article thus lends empirical support to a recent literature that emphasises the role of bankers’ incentives for continued sovereign borrowing.