The defaults of Philip II have attained mythical status as the origin of sovereign debt crises. Four times during his reign the king failed to honor his debts and had to renegotiate borrowing contracts. In this paper, we reassess the fiscal position of Habsburg Spain. New archival evidence allows us to derive comprehensive estimates of debt and revenue. These show that primary surpluses were sufficient to make the king’s debt sustainable in most scenarios. Spain’s debt burden was manageable up to the 1580s, and its fiscal position only deteriorated for good after the defeat of the “Invincible Armada.” We also estimate fiscal policy reaction functions, and show that Spain under the Habsburgs was at least as “responsible” as the US in the 20th century or as Britain in the 18th century. Our results suggest that the outcome of uncertain events such as wars may influence on a history of default more than strict adherence to fiscal rules.
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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number
1121.
Find related papers by JEL classification: H50 - Public Economics - - National Government Expenditures and Related Policies - - - General H60 - Public Economics - - National Budget, Deficit, and Debt - - - General E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy F34 - International Economics - - International Finance - - - International Lending and Debt Problems