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Lending to the Borrower from HellDebt, Taxes, and Default in the Age of Philip II$
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Mauricio Drelichman and Hans-Joachim Voth

Print publication date: 2014

Print ISBN-13: 9780691151496

Published to Princeton Scholarship Online: October 2017

DOI: 10.23943/princeton/9780691151496.001.0001

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Risk Sharing with the Monarch

Risk Sharing with the Monarch

(p.211) Chapter 7 Risk Sharing with the Monarch
Lending to the Borrower from Hell

Mauricio Drelichman

Hans-Joachim Voth

Princeton University Press

This chapter analyzes the role of contingent scenarios and nature of the defaults. Over the last 800 years, many periods of debt accumulation have been followed by default. Despite these disruptions, the market for sovereign debt did not disappear. At least, in the case of asiento lending to Philip II, excusable defaults were an important factor. Studying the loan documents directly, the chapter shows that a significant share of short-term loans contained contingency clauses. It then explores the different types of loan modifications along with their impact on cash flows and loan maturity. These modifications allowed effective risk sharing between king and bankers—an institutional solution that offered many of the desirable properties that contingent debt would have today.

Keywords:   defaults, sovereign debt, asiento lending, short-term loans, contingency, loan modifications, cash flows, loan maturity, risk sharing, contingent debt

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