While European capital markets take a much-needed warm bath in European Central Bank president Mario Draghi’s munificent liquidity scheme, they might enjoy a salutary muse on the history of sovereign default in Europe.
Far from being “unprecedented”, as commentators keep blaring, non-payment of debt has a long and distinguished history. As work by Ken Rogoff and Carmen Reinhart of Harvard University has highlighted, few states are innocent — and certainly not those which at any given time were the most powerful economies.
Since 1500, the Netherlands and England have defaulted once each – and as the table produced by Credit Suisse below shows, that is without counting numerous 19th century debt “conversions” by the UK that would have made even today’s ISDA determinations committee gulp.
Germany, including Prussia, is in this context the equal of Greece, having defaulted five times. One for Lucas Papademos to mention to Angela Merkel next time they meet, perhaps? Or maybe not.
France may be right to get nervous about the current glare of rating agency scrutiny, but at least it has experience in these matters — its bevy of nine defaults beats Portugal by two. However, the undisputed champion of this bad debtors’ competition is Spain, with 18 defaults since 1500.
The first four of those, between 1557 and 1607, were attributable alone to Philip II, who learned early in his career that defaulting need not debar you from the markets for long.
Habsburg Spain was the pre-eminent European power of the day. Its military overstretch — fighting rebellious Dutch, expansionary Turks and English pirates — seemed less salient to its financiers than the ships full of South American silver.
The Fuggers, southern Germany’s answer to the Medici, are said to have been ruined by the Spanish defaults, to the benefit of the banking network in Genoa which replaced them.
The Genoese were, according to a Harvard University Press paper, prepared to take a “calculated gamble in lending to [Philip II] because the steady silver flows meant that the Crown would be liquid enough to repay a good part of the loans”.
Sound familiar? Naïve optimism about securitised cashflows, anybody? By the end of Philip II’s reign, interest payments accounted for 40% of state revenues.
The great historian of the period, Fernand Braudel, writing in 1949, thought the bankers got the better of Philip II, “hopelessly out of his depth in the world of international finance”, in a way strongly reminiscent of now.
If “the Castilian state lost every time, it was because it was no match for the hombres de negocios who were centuries ahead of it. Philip II’s raging against the Genoese was a sign of his obstinacy, his thwarted will, but not his common sense”.
There were casualties, of course. “Every time the state declared itself bankrupt, bringing contracts to a violent end, there were always some actors who lost, fell through a trap-door, or tip-toed away towards the wings.”
But who won the battle? It is hard to call. After its 18 defaults, Spain is still very much with us, and will remain, even if it has to default again. On the other hand, its monarchy and empire have gone, and its power was eclipsed by that of France within a lifetime after Philip II’s death. Avoiding a 21st century default may involve sacrifices of sovereignty that change the Spanish people’s relationship with their state.
The Fuggers and the Genoese bankers are long gone. But the model of capitalism and financial markets that they helped to develop is very much still with us – and arguably, its hold over states is stronger than ever.
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