A Prudent Man’s Curse

AuthorVitor Gaspar
PositionDirector of the IMF’s Fiscal Affairs Department.

Straight Talk

In 1596, Philip II of Spain defaulted on debt for the fourth time. An experienced and systematic administrator with an eye for the tiniest detail, he requested and pondered arguments from his trusted advisors, approaching difficult political decisions from every angle. He organized the complete administrative records of his government’s workings. He even ordered architect Juan de Herrera to redesign a castle into the first-ever government archive, which strictly adhered to archival rules and served as the repository of documents produced by the Crown until the 19th century. His wise and considered approach to the conduct of political matters, and his many innovations to public administration, earned him the moniker Philip the Prudent.

Despite his administrative brilliance, Philip was forced into default early in his reign, in 1557 and 1560—for two reasons. First, Philip inherited personal debts belonging to his father, Charles V—at a time when the distinction between private and state debts was not well defined—with limited resources to service them. Second, and perhaps more important, the Spanish coffers were exhausted after war with Henry II of France.

When urged to default for a third time, in 1574, Philip postponed the decision for over a year. This time, default would affect debt that he himself had contracted with his Genovese bankers and jeopardize his personal reputation. But in 1575 he finally agreed to sign a decree (Decreto) suspending debt payments on asientos—the Crown’s short-term, high-cost debt instruments typically serviced with silver from the Americas.

The Decreto explained that the king was disappointed so few creditors were willing to advance funds to the Crown, that he was shocked by the high interest rates, and that the use of credit, in general, was a dubious activity on both moral and legal grounds. Hence, no payments would be made until a thorough review of all terms, conditions, and past payments could be scrutinized. These were the grounds for the suspension of debt payments.

For the fourth default, in 1596, there is no record of hesitation, and the 1596 Decreto was expeditiously signed.

Why did Philip the Prudent resort to expensive asientos and then to default? The reasons were political. By doing so, the king remained in sole control of his resources. He did not have to make political concessions to the Assembly, whose approval was required to issue longer-term debt backed by regular...

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