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


Drelichman, Mauricio; Voth, Hans-Joachim (2015). Risk sharing with the monarch: contingent debt and excusable defaults in the age of Philip II, 1556–1598. Cliometrica, 9(1):49-75.

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 state-contingent debt also sheds light on the nature of defaults—they were simply contingencies over which Crown and bankers had not contracted previously.

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 state-contingent debt also sheds light on the nature of defaults—they were simply contingencies over which Crown and bankers had not contracted previously.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Uncontrolled Keywords:Sovereign debt, excusable default, contingent lending, Spain
Language:English
Date:January 2015
Deposited On:28 Jan 2015 15:50
Last Modified:29 May 2016 19:16
Publisher:Springer
ISSN:1863-2505
Publisher DOI:https://doi.org/10.1007/s11698-014-0108-8
Related URLs:http://dx.doi.org/10.5167/uzh-94331

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