Working Paper: CEPR ID: DP8492
Authors: Mauricio Drelichman; Hans-Joachim Voth
Abstract: Contingent sovereign debt has the potential to create important welfare gains--but actual issuance is rare. Using hand-collected archival data, we examine the first known case of large-scale issuance of contingent sovereign debt in history. Philip II of Spain entered into hundreds of contracts whose value and due date was contingent upon verifiable, exogenous events such as the arrival of silver fleets. This allowed for effective risk-sharing between the king and his bankers. The defaults that occurred were excusable, occurred in bad states of the world, and under conditions that could not be foreseen or contracted on ex ante.
Keywords: contingent debt; emerging debt markets; excusable default; Philip II; sovereign debt
JEL Codes: F21; F34; N23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| contingent sovereign debt issuance (H63) | effective risk-sharing (G32) |
| contingent sovereign debt issuance (H63) | financial stability of the monarchy (E63) |
| economic shocks (F69) | defaults experienced by Philip II (H19) |
| defaults experienced by Philip II (H19) | lending relationships (G21) |
| defaults experienced by Philip II (H19) | market perceptions (G14) |