Lending to the Borrower from Hell

Mauricio Drelichman and Hans-Joachim Voth reconstruct the finances of Philip II of Spain, who suspended payments on his debts four times between 1557 and 1596 and is the standard historical example of a serial sovereign defaulter. Their evidence is unusual: they assembled the complete surviving record of the loan contracts, or asientos, between the Spanish crown and its Genoese bankers, which lets them calculate what the lenders actually earned.

The finding overturns the received account. Lending to Philip was profitable across the whole period. The bankers charged rates that priced in the expected defaults, the settlements after each suspension typically converted short-term debt into longer-term annuities rather than writing it off, and the major banking families continued lending after each episode because the business remained attractive. The authors also show that Philip's fiscal position was sustainable by the standards of the time, with debt service well within the crown's revenue capacity, so the suspensions were liquidity events driven by silver fleet timing and war expenditure rather than insolvency.

Their explanation for why lending continued rests on coordination among the Genoese families, who could collectively withhold credit from a crown that treated any one of them badly, and on the fact that the crown needed the network's ability to move money to armies in the Netherlands. The book is quantitative economic history and demands attention, but it is clearly written. It has become a standard reference in the sovereign debt literature and is regularly cited in arguments about whether reputation or sanctions sustain sovereign lending.