Can the Eurozone handle a crisis in Italy?
[…] none of the powerful stabilization instruments that the euro area has developed over the years could be deployed to rescue Italy. Following crisis-related downgrades, Italy would no longer be eligible for the ECB’s quantitative easing bond-purchasing program. The ECB would stop accepting Italian bonds as collateral. Access to emergency support programs—the ESM, and through it, the Outright Monetary Transactions (OMT) program—would be conditional on fiscal adjustment, the opposite of what Italy’s new government has promised.
How Worried Should We Be about an Italian Debt Crisis?
By: Olivier Blanchard, Silvia Merler, Jeromin Zettelmeyer – Peterson Institute, Bruegel
Italy’s interconnectedness
[…] while the rise in Italian spreads has affected both Spain and Portugal, the effect for both countries is limited and merely takes them back to where they were in early 2018. As such, it is not obvious that further deterioration in Italy would cause a sudden, dramatic economic crisis on the Iberian Peninsula. And if Italy does not pose a dangerous contagion risk to other euro area countries, then any intervention by the European Central Bank (ECB) to ease market pressure on Italy will be impossible to justify.
Italy’s New Government: Bad News for Europe But No Cause for Panic in Markets
By: Jacob Funk Kirkegaard – Peterson Institute
The large Italian public debt and Cottarelli’s views
Bassanetti, Cottarelli and Presbitero argue that both the debt/GDP level and its dynamics need to be considered when evaluating default probabilities and loss of market access.
This is good news in a world in which public debt ratios have, particularly in many advanced economies, reached unprecedented levels after the 2008-09 global economic and financial crisis. These levels have prompted many observers to conclude that some “cold turkey” intervention to reduce public debt-to-GDP ratios – notably a massive fiscal tightening or a major debt restructuring – is necessary if countries want to free themselves from the persistent exposure to a public debt crisis or, for those who have lost market access, if they want to regain it. But massive fiscal tightening can backfire, economically and politically, and debt restructuring operations are risky and costly.
Lost and Found: Market Access and Public Debt Dynamics
Authors: Antonio Bassanetti, Carlo Cottarelli, Andrea Presbitero
From: Banca d’Italia, IMF
