@ayekides: assuming BGs are bodyguards, i make EXTENSIVE use of them, they are like the backbone of my army at the start (especially seeing how they spawned very fortuitously for me during this particular game).
I tried keeping the battles afield (Baktra has a horrible city layout when attacked from the west, even with huge walls), but no matter how close i am to the city, they seem to be able to just bypass me and besiege the city without involving my out-of-city army at all :(

@XSamatan: i know that the AI is hard-coded (or whatever the technical term), and i guess i was just venting out of frustration. Getting his ass handed to him can wreak havoc on a man's pride. I'll keep better track of the settlement details next time (maybe i'll outsource that one to my irl accountant :)

@Ca Putt: I had the following cities: Baktria, Haomavarga, Sulek, Kophen. I already had them for quite a while when the AS suddenly decided to attack Baktra, and I had about 20,000 in the bank, a steady 1,500-2,000 income, and a fortune invested in huge markets, mines and the like; so it's fair to say i was not slouching on the development. Yet my economy still plummeted after a single detrimental event. Even when a large/huge market was finished a few turns after the siege.

@fomalhaut: i hope the base diplomacy/economy for medieval 2 is much better in this respect, because this really is the very finest strategy game out there and it's such a shame to see all that potential compromised by things like this, which are entirely out of the modders' hands.