Resumen de The theory of sovereign debt and Spain under Philip II
This paper examines lending by a Genoese-led cartel to Philip II of Spain (1556-1598) from the perspective of theory on sovereign debt. I find that a class of debt models which assumes lenders have an additional penalty beyond denying future credit accounts for the principal features of the episode. In particular, a version of Bulow and Rogoff (1989b) with asymmetric information accounts for the Genoese's imposition of an embargo on payment transfers to Philip Il's Army of Flanders. In addition, this model's predictions for debt ceilings corresponds to evidence on the Crown's debt ceiling and estimates of lower bounds on the value of the Genoese's penalty and the Crown's ability to repay. Evidence from the episode goes against debt models that posit that implicit insurance is essential to the self-enforcement of sovereign debt: when Philip 11 lost the Armada in 1588, easily the biggest "bad shock" of the reign, there was no default, bankruptcy, or effort to reschedule debt held by the Genoese cartel.
