Abstract
AbstractThis article examines the reputation recovery of Portugal's public debt during the war of liberation against the former Habsburg ruler. Using novel datasets on long‐ and short‐term debt and nominal interest rates, this study provides evidence that the sovereign borrower used debt credibility to build a pact of regime in a revolutionary context with implications for financing the war. The Portuguese kings followed an implicit budget balance rule as a reputational scheme, which made Portugal an exceptional case of military success with a low debt‐to‐GDP ratio and low interest rates. These conclusions contribute to the literature in various attributes of war finance, debt management, and state‐making by showing that default avoidance could be as important to military success as fiscal capacity.
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