Spain is bringing in riches from its colonies in Central and South America according to Robert Goodwin in his book Spain – The Centre of the World 1519 -1682 published by Bloomsbury Press, London,2015, what does Spain do? The Habsburg’s were Catholic and soon the Spanish side of the family became the dominate in both armies and church affairs. As well as the many palaces, churches and universities which lead to patrons of art which lead to a thriving arts and culture scene in Spain. Two of the well known artists are painter El Greco and novelist Miguel Cervantes who wrote Don Quixote.

Returning to banking, banking was in its infancy in the early 1500’s. Banking was primarily for travellers, merchants and governments who needed to send money over long distances. The money was made on its spread on the interest rate and lending out the client’s deposit while the bill of exchange was in transit. Banking was relatively simple and the bankers travelled between the great fairs of Europe.

The gold and silver that flooded into Spain was a massive stimulus to trade in Europe and also brought inflation because all the economies of Europe were now interconnected. This changed the focus of the banking industry and international merchant banking was born.

The Spanish crown borrowed in two basic ways. The foundation stone of sovereign debt was juros -a range of government bonds securitized in one way or another with a guaranteed rate of interest over the life of the loan. The interest was typically linked to a source of income ie a sales tax. The other way was called asientos- floating debt agreed on an ad hoc basis to fund some particular project or campaign on which the interest rate was higher and the term of the loan shorter.

The Genoese bankers innovation was to create a secondary market for Spanish sovereign debt by selling shares in the juros to a range of investors. This worked well until 1570 when Spain was trying to figure out its obligations and realized it was short of money. Much of the lending was tied to resources coming from Mexico and Peru and it was beginning to slow down, but the Hapsburg empire with its armies, catholic protection, the infrastructure projects in Spain were expensive. Fortunately for Spain, innovation in silver mining by Bartolome de Medina known as the patio process increased the yields from the mines of silver. The silver production increased and Spain was saved for another 50 years.

Linking to dividend paying stocks, the themes really never go away, Spain was awash in riches and spent the money to be the center of the universe. The commodity production slowed down and Spain was in trouble. The resources are still coming but there was an imbalance between revenues and expenses. This is the reason why management matters.

There are more questions than answers, till the next time – to raising questions.