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Authors Nicola Borri, Gianfranco di Vaio and Giuseppe Ragusa write that as the sovereign debt crisis continues to sweep through the eurozone, Italy’s public debt is once again at the core of the European economic and political debate. In order to add to such debate, the authors conduct a simple simulation exercise to predict the evolution of the Italian debt-to-GDP ratio. These simulations extend those in the BIS Quarterly Review (2011) by considering multiple scenarios regarding GDP growth and the yield curve.
The authors find that the debt-to-GDP ratio is sustainable even at the current high interest rates under the assumption of a balanced budget starting in 2014. In the predicted scenarios, however, sustainability crucially depends on a minimum positive growth rate for nominal GDP to occur in the coming years.
The article also covers the following areas: outstanding Italian government; fiscal policy assumptions; cost of debt servicing scenarios; GDP growth scenarios; simulations results - interest payments and outstanding debt; simulations results - different scenarios; caveat emptor; and political feasibility of large primary surpluses.
The authors look at the evolution of the Italian debt-to-GDP ratio and conclude that it is sustainable even at the current high interest rates. The goal of economic adjustment is within reach, but requires hard sacrifices in terms of future primary balances. Current high borrowing costs might be motivated by the uncertainty regarding future growth rates and by the potential negative feedback effects of the fiscal measures on economic growth itself.