Why do lenders time and again loan money to sovereign borrowers who
promptly go bankrupt? When can this type of lending work? As the United
States and many European nations struggle with mountains of debt,
historical precedents can offer valuable insights. Lending to the
Borrower from Hell looks at one famous case--the debts and defaults of
Philip II of Spain. Ruling over one of the largest and most powerful
empires in history, King Philip defaulted four times. Yet he never lost
access to capital markets and could borrow again within a year or two of
each default. Exploring the shrewd reasoning of the lenders who
continued to offer money, Mauricio Drelichman and Hans-Joachim Voth
analyze the lessons from this important historical example.Using
detailed new evidence collected from sixteenth-century archives,
Drelichman and Voth examine the incentives and returns of lenders. They
provide powerful evidence that in the right situations, lenders not only
survive despite defaults--they
thrive. Drelichman and Voth also demonstrate that debt markets cope
well, despite massive fluctuations in expenditure and revenue, when
lending functions like insurance. The authors unearth unique
sixteenth-century loan contracts that offered highly effective risk
sharing between the king and his lenders, with payment obligations
reduced in bad times.A fascinating story of finance and empire, Lending
to the Borrower from Hell offers an intelligent model for keeping
economies safe in times of sovereign debt crises and defaults.
