OK; I'll try to help. My contribution is this assessment of the strength of Spain's financial position in the days of Philip II. It was written a few years ago for other purposes, but I think it pretty well addresses your question, nonetheless.

The strength of Spain’s finances in the second half of the 16th century was a controversial subject even when Philip II was alive. Today, historians debate even the apparently straightforward question of whether the state that the king bequeathed in 1598 – a global empire which included much of the Americas, large parts of Italy and, in name at least, the Low Countries – could sustain its considerable debts.[1] It has been argued that Philip’s Spain was a wealthy state fatally burdened by a foreign policy that saw only six months of peace in a reign of 40 years. Yet it has also been maintained that Spain entered an irreversible decline during Philip’s reign, that its economy began to shrink, and that its problems ran much deeper than its economic management. I'll argue that Spain’s financial position was indeed dangerously weak for most of Philip’s reign, and that the king himself was largely to blame for this state of affairs. It will conclude that Philip had little understanding of economic affairs, failed to construct a long-term economic policy or delegate power to competent subordinates, and rarely learned from his mistakes. Most importantly, it will argue that Philip consistently refused to adapt his domestic and foreign policies to conform to economic realities that – while admittedly poorly understood – were grasped by contemporaries during his reign.

Philip’s empire was certainly built on relatively weak foundations. Spain’s population, 7 million, was half that of its major rival, France, and its soil was poorer;[2] the coast was thinly populated thanks to the threat of Turkish slavers.[3] More serious was the lack of any significant industry. Studies of the largest trade, that in wool, show that it was in decline after 1549,[4] and J.H. Elliott makes the important point that the Castilian economy was “closer in many ways to that of an Eastern European state like Poland, exporting raw materials and importing luxury products, than to the economies of Western Europe.”[5] Contemporaries saw evidence that Spain was labouring under insupportable burdens by 1598. “The cities and the big towns are empty of people, the smaller villages completely depopulated,” wrote Baltasar de Barrientos that October. “There is no point untouched by misery.”[6]

The king was not, of course, solely responsible for the economic difficulties Spain suffered during his reign. It was usual for early modern nation states to encounter significant financial problems because their ambitions outstripped their means of raising finance;[7] they had “mastered the technique of raising large armies,” A.W. Lovett puts it, “but not, as yet, that of paying for them.”[8] But a complicating factor in Spain’s case was its heavy reliance on silver shipments from the Indies. At times the state’s share of these accounted for as much as 40% of revenues, but there were also years when the treasure fleet did not arrive at all, leading to sharp fluctuations in income.[9] Other problems were even further beyond Philip’s control. The wasteland that Barrientos described was largely the product of three years of famine, which killed 10% of Spain’s population between 1594 and 1598.[10]

There can be no doubt, however, that much of the economic burden that tested the strength of Spain’s finances was a direct result of Philip’s policies, and in particular his willingness to wage constant war. The king was frugal in other matters; his court cost less than 500,000 ducats a year.[11] However, the Dutch Revolt alone cost between 2m and 4m ducats a year, rising to 10m by 1598, and the Spanish Armada of 1588 a further 10m. Drelichman and Voth calculate that 60% of state revenues were spent on the military over the course of the reign,[12] an expenditure that proved almost entirely unproductive.

Spain, again, was not alone in struggling to pay the costs of war. Parker notes that when Elizabeth I sent 15m ducats to the Dutch – payments spread over 18 years – the effort “ruined her,” and by the time the Dutch Republic gained independence, it had accumulated debts of 140m guilders.[13] The difference in Philip’s case was the scale and the duration of his conflicts. Spain fought concurrently against the French, English, Turks, and – for 80 years – the Dutch, wars that might have been ended more quickly by another ruler. When Philip’s contemporary, Henry IV, succeeded to his divided and financially precarious state, he changed his faith to end France’s wars of religion – and died solvent and with a surplus totalling about 20% of his annual revenues.[14] Philip proved himself consistently unwilling to make such compromises.

The king’s wars did more than increase the tax burden on almost every Spaniard (Castilian peasants paid half of their income in taxes, tithes and duties by 1598.)[15] They forced the Spain to turn to turn to Europe’s bankers for loans. This was because attempts to raise new taxes were not only unpopular, but also difficult to implement and unpredictable; even the Castilian cortes, the most compliant of all Philip’s parliaments, refused seven of the 13 requests he made for a vote of the servicio subsidy.[16] But loans came at a severe cost. Philip borrowed on an unprecedented scale, and his borrowings incurred significant interest, so much so that by 1598 interest on debt consumed 40% of his state’s entire income.[17] In the course of the reign, moreover, the king was forced to declare bankruptcy on four occasions.

In their recent analysis, Drelichman and Voth play down the significance of Philip’s bankruptcies, claiming that Spain’s “debt burden was manageable up to the 1580s, and its fiscal position only became disastrous after the defeat of the ‘Invincible Armada.’”[18] For them, bankruptcy – even the third bankruptcy of 1575, which was the product of debts totalling 74m ducats, fourteen times the state’s annual revenues, and which Parker sees as a catastrophic turning point for Spain,[19] was a financial tool capable of being wielded to produce positive benefits for the state. Lenders, they argue, continued to lend; indeed, 20% of the 438 loan agreements that Philip signed during his reign contained provisions for handling earlier defaults. And even when, in 1575, the Genoese attempted to cut off loans altogether, Philip was able to borrow enough from the Fuggers to sustain his wars, and settle two years later with interest written down by 38%.[20] Yet if, as Drelichman and Voth claim, bankruptcies “were not signs of insolvency,” this was far from apparent to contemporaries, who took note of simple indicators: in an average year, Spain had revenues of 6.6m and carried debt of 34.9m.[21] Certainly Philip himself believed his loans significantly constrained him, and his willingness to anger his most influential citizens by seizing the cargoes of the entire Indies treasure fleet three years in succession, and to dispose of long-term revenue streams by farming taxes and selling wasteland, strongly suggest that he would have preferred not to have contracted them.[22]