Economics serving society

Debt policy under constraints: Philip II, the Cortes, and Genoese bankers

Carlos Álvarez-Nogal and Christophe Chamley

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In the second half of the 16th century, Spain’s public debt reached, for the first time in its history, a “modern” level of about 60 per cent of national production. The largest part of this debt – perpetual bonds called juros - were guaranteed by the taxes paid by the towns to the central government, the encabezamiento: each town handed over its contribution to the centre after having deducted the interest on the juros owing to it. The system gave the holders of juros direct control over debt servicing through local government intermediaries. This control reinforced the credibility of the public debt and reduced its costs for the central government. The tax levels for the 18 main towns and regions were decided by a simple majority in the Cortès. Together, these contributions imposed a de facto ceiling on the servicing of the long-term debt and thus on the total amount.
In September 1575, Philip II decreed a payment stop on the medium-term debt (asientos) underwritten by the bankers of Genoa. The usual interpretation of this decree is bankruptcy because of a lack of resources or of liquidity. However, using archives in Simancas, Valladolid and Madrid, the authors show that this interpretation is mistaken. The payment stop was rather the result of conflict between Philip II and the towns. The king wanted to triple the encabezamiento and thus to get rid of the ceiling on domestic debt, which the Cortès opposed. A similar impasse occurred in the United States in 2011 and 2013, when members of Congress tried to prevent the raising of the public debt ceiling. In Castile, the economic crisis caused by the suspension of payments by the Genoese bankers forced the hand of the Cortès and after more than two years, it permitted the doubling of the encabezamiento. The trade fairs, interrupted by the freezing of the credit market, never regained their pre-crisis level of activity.
Original title of the article: Debt policy under constraints: Philip II, the Cortes, and Genoese bankers
Published in : The Economic History Review, 67 (1), pp. 192-213 - février 2014
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Portrait of Philip II of Spain by Sofonisba Anguissola (Prado Museum)