King Philip Of Spain

Default More Than 400 Years Ago Leaves Scars: Christophe Chamley

The House Republicans , many of them opposed to raising the federal government’s borrowing ceiling, might take a lesson from the first sovereign debt crisis: Spain’s default in 1575. What events more than 400 years ago suggest is that it’s easy to ignite a dangerous chain reaction in financial and credit markets and inflict lasting damage on the economy.

Republicans today are playing the part of the cities of Castile, whose delegates to the Cortes (the Spanish parliament) opposed raising taxes to service King Philip II’s long-term bonds.

Spain, at the time, was the world’s sole superpower. Contemporaries described it as an empire “over which the sun never sets.” Yet the king needed the cities’ consent to borrow at a reasonable rate. And he needed it for a reason: The cities collected the taxes.

Each of the 18 main cities of Castile levied a special tax earmarked for long-term debt service. The level of this tax was set every six years through negotiation with the king. Tax collections were used first to pay off local long-term bondholders, with the rest sent to the central government. The local long-term bondholders were, in large part, the elderly living in the area. So local taxpayers realized that if they didn’t pay, their parents would be hurt. Thus, this precursor to Social Security had an effective enforcement mechanism -- the ire of the elders.

But the king could only exploit this confluence of interests so far. The Cortes set the earmarked tax rate by majority rule, and that limited the king’s issuance of what were, in effect, his AAA securities. The king also issued other bonds secured by other, non-earmarked revenue. These securities were of a lower grade and sold at lower price.

Thanks to Philip’s expensive military adventures in the Netherlands and the Mediterranean, Spain ’s debt had reached half of gross domestic product by 1573. At that point, the cities balked at paying higher taxes. For the next two years, they refused to budge in their confrontation with the king.

Finally, in September 1575, Philip took a circuitous route to outmaneuver the Cortes. He suspended payments not on the long-term debt, but on the short-term debt, which was owed primarily to Genoese bankers. The people cheered. Resentment against bankers ran as high then as now -- perhaps higher, because the bankers were foreigners. The upshot, however, was default and a full-blown credit crisis.

Appraiser Workshops: Art Advisory

The Financial Times has an interesting article on how the top art advisory firms are able to influence the art market. The article gives some good insight into the art advisory profession as well as some history, and how it has rapidly grown over the past decade. The top advisors have access where many others dont, and are able take advantage the best opportunities offered from dealers and art fairs. Art advisory covers much territory from educating clients, to seeking the best work at the best prices, arranging financial transactions, and being familiar with tax issues, as well as working with dealers and artist to properly "place" pieces. As an occupation, art advising mainly started after the mid-twentieth century and has really exploded in the past 10 years. Before that, collectors generally relied on art dealers, or were guided by their local museum directors and curators. In the 19th and early twentieth centuries the driving force behind many great collections – often now in museums – were legendary merchants such as Duveen (Morgan, Frick and Mellon), Agnews (Kenwood House) or Vollard (Schukin and Morozov). But “advising is not as new as one might think”, Westreich points out, noting that Velásquez counselled King Philip IV of Spain on his acquisitions in the 17th century. “Today the playing field is far bigger, and there is no longer a single way of building up a collection,” she says. The vastly expanded art market is not now just concentrated in western Europe and the US; China, India, the Middle East and Latin America all offer a lot of new art and artists. The events are worldwide as well: from art fairs such as Hong Kong and Dubai to biennales, triennials and other happenings, from Yokohama to São Paulo. And the choice is rich, from the proliferation of art galleries to the sophisticated operations of the auction houses. Buyers – who are often busy making money – simply don’t have the time to stay informed about everything that is happening. Advisers’ mobility is important, says Noah Horowitz, author of The Art of the Deal: Contemporary Art in a Global Financial Market. “Their numbers have increased in lockstep with those of independent curators,” he says, adding that “advisers also provide valuable financial services, on tax for instance”. Today most of the very wealthy wouldn’t dream of buying art without an adviser.

Philip of Spain

Philip V of Spain, the king who reigned twice

The Atlantic monthly

The history of the reign of Philip the Second, king of Spain

Chronicles of England, France, Spain, and the adjoining countries, from the latter part of the reign of Edward II. to the coronation of Henry IV