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

Whydolenderstimeandagainloanmoneytosovereignborrowerswhopromptlygobankrupt?Whencanthistypeoflendingwork?AstheUnitedStatesandmanyEuropeannationsstrugglewithmountainsofdebt,historicalprecedentscanoffervaluableinsights.LendingtotheBorrowerfromHelllooksatonefamouscase--thedebtsanddefaultsofPhilipIIofSpain.Rulingoveroneofthelargestandmostpowerfulempiresinhistory,KingPhilipdefaultedfourtimes.Yetheneverlostaccesstocapitalmarketsandcouldborrowagainwithinayearortwoofeachdefault.Exploringtheshrewdreasoningofthelenderswhocontinuedtooffermoney,MauricioDrelichmanandHans-JoachimVothanalyzethelessonsfromthisimportanthistoricalexample.Usingdetailednewevidencecollectedfromsixteenth-centuryarchives,DrelichmanandVothexaminetheincentivesandreturnsoflenders.Theyprovidepowerfulevidencethatintherightsituations,lendersnotonlysurvivedespitedefaults--theythrive.DrelichmanandVothalsodemonstratethatdebtmarketscopewell,despitemassivefluctuationsinexpenditureandrevenue,whenlendingfunctionslikeinsurance.Theauthorsunearthuniquesixteenth-centuryloancontractsthatofferedhighlyeffectiverisksharingbetweenthekingandhislenders,withpaymentobligationsreducedinbadtimes.Afascinatingstoryoffinanceandempire,LendingtotheBorrowerfromHelloffersanintelligentmodelforkeepingeconomiessafeintimesofsovereigndebtcrisesanddefaults.