Prologue

This prologue provides an overview of state debts and sovereign default in the sixteenth century, looking in particular at Philip II's defaults. The debts and defaults of Philip II suggest that there is another way for financing government borrowing: prearranged reduction in what a government owes and has to pay to creditors in bad times. Indeed, lenders agreed to forego interest or extend the maturity of loans if the king experienced a bad shock. This system exhibited remarkable stability, bringing essentially the same banking dynasties together with the monarch for over half a century, providing financing and insurance. Another remarkable feature of the debt issuance system evolved by Philip II and his financiers is the stability of the banking institutions, the main innovation of which was an effective “risk transfer” mechanism.