EP 35: Lending To The Borrower From Hell (with Mauricio Drelichman)
Mar 6, 2025
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Mauricio Drelichman, co-author of 'Lending to the Borrower from Hell,' delves into the intriguing financial history of King Philip II of Spain. He reveals how Renaissance bankers innovated lending practices despite dealing with a defaulting monarch. The conversation highlights the impact of Spain's silver trade on economics and military spending, and discusses how historical lending practices inform modern finance. Drelichman also explores the complex relationship between government debt and political power, shedding light on defaults' theological justifications.
Lending to Philip II, despite multiple defaults, revealed that long-term relationships allowed lenders to profit significantly over generations.
The introduction of innovative financial instruments like Asientos and Juros showcased the evolution of sovereign debt management and risk mitigation strategies.
Deep dives
Understanding Sovereign Debt Defaults
The discussion revolves around the complexities of lending to Philip II of Spain, who defaulted on debts multiple times yet remained a profitable venture for lenders. Despite facing defaults in 1557, 1560, 1575, and 1596, lenders primarily benefited from valuable returns, leading to the conclusion that lending to Philip was a sound business decision. A critical aspect is that lenders, such as the Genoese bankers, conducted long-term relationships that averaged out the risks over generations, resulting in consistent net gains despite individual loan defaults. The realization of this financial strategy highlights the inherent contradictions in the relationship between high-profile borrowers and their lenders.
The Role of the Asiento in Lending
The podcast explains the innovative financial instrument called the Asiento, which was essential to the lending practices during Philip II's reign. Unlike traditional personal loans, Asientos allowed lenders to mitigate risks through insurance-like contractual clauses. Clauses such as extending payment if silver fleets failed to arrive helped secure profits for lenders by tying them to predictable income streams. This method marked a significant shift in sovereign debt management, highlighting the sophisticated financial strategies employed by bankers of the time.
Juros as Reliable Investments
Juros, or perpetual bonds backed by tax revenues, served as secure investments during Philip II's reign, contrasting strongly with the more volatile Asientos. The king’s commitment to honor Juros payments, even in the face of defaults on other debts, established their reputation as exceptionally safe assets and made them attractive to a wide array of investors, including charitable institutions. The predictability of tax revenues and the structure of these bonds ensured that Juros maintained their value, while Asientos faced unpredictable defaults. This distinction illustrated both the evolving nature of sovereign debt and the investors' diverse approaches to mitigating risk.
Financial Implications of Resource Windfalls
The discussion touches upon how Spain's influx of silver from its colonies resulted in fiscal irresponsibility, ultimately eroding the state's capacity for prudent governance. Unlike in countries with constrained governments that are required to negotiate taxes, Philip II was able to finance wars without consulting his parliament, leading to a lack of accountability. This unchecked access to resources allowed Spain to accumulate substantial debt without building a robust fiscal framework, contrasting with the more disciplined financial practices that other nations developed. The historical context underscores how resource windfalls can undermine state capacity, affecting long-term governance and stability.
Russell Napier enjoys a fascinating chat with Mauricio Drelichman who (together with Hans Joachim-Voth) is the author of Lending to the Borrower from Hell: Debt, Taxes, and Default in the Age of Philip II. Together, they explore how this account of the freely-defaulting 16th century King of Spain changes our perceptions of financial history.
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