The Sustainable Debts of Philip II

This chapter addresses the sustainability of debt. A systematic analysis based on the International Monetary Fund's (IMF) methodology to evaluate fiscal sustainability shows that Castile was able to service its debts in the long run. While liquidity was scarce during periods of intense warfare, years of relative peace brought large surpluses. The data collected from Castile's annual fiscal accounts produced new yearly series of revenue, military expenditure, short-term debt issues, and short-term debt service. The resulting database spans a full 31-year period—enough to employ modern quantitative techniques. This analysis provides strong evidence that Castile's fiscal position in the second half of the sixteenth century was on a solid footing. The chapter then assesses whether the events that led to major downturns in Castile's financial fortunes could have been anticipated.