The Italian crisis is only just beginninghttps://www.spiked-online.com/2020/04/27/the-italian-crisis-is-only-just-beginning/In December 2019, Italy’s debt was €2.4 trillion or 135 per cent of GDP – the highest in the Eurozone. Last Tuesday, Italy’s budget watchdog forecasted a decline in GDP of 15 per cent in the first six months of this year.
The government’s Economic and Financial Document foresees public debt rising in 2020 to nearly 156 per cent of GDP. But if debt rises and output falls more than is projected, Italy’s debt-to-GDP ratio could balloon to around 200 per cent.It is not impossible to service such a large debt – Japan’s public debt to GDP ratio is
projected to reach 240 per cent this year. But Italy’s current economic crisis follows decades of weak growth and productivity. That makes servicing the debt all the more difficult and expensive.
This is why Conte had previously pushed so hard for so-called
corona bonds, which would allow struggling Eurozone members to borrow money at much lower prices, in line with those paid by the richer and more frugal northern countries. This idea is now dead, as the rescue plan will operate through the MFF and other existing EU mechanisms.
There is a very real possibility that Italy could default on its debt. This would result in widespread bank failures as much of the sovereign debt is held by Italian banks. It would also threaten a wider financial Eurozone crisis, given the size of Italy’s economy and how many EU financial institutions and companies are deeply involved in it. Default could even lead Italy to leave the EU and the Eurozone.It would be possible to manage an Italian default within the EU and the Eurozone, but the downsides are considerable. In
such a scenario, Italy’s debt would have to be restructured and its bonds given a ‘haircut’ to give the state enough money to nationalise the banks to prevent the loss of savings. Debt restructuring was incredibly painful in Greece, but it could be possible through the intervention of the European Central Bank (ECB).