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Interest Rate Shock and Sustainability of Italy's Sovereign Debt

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  • William R. Cline

    (Peterson Institute for International Economics)

Abstract

Contagion from Greece, together with domestic political uncertainty in Italy, caused interest rates on Italian sovereign debt to spike in the second half of 2011. By January 2012, however, the short-term rate had fallen sharply and the long-term rate had eased as well. But this improvement is by no means assured to continue. Cline examines the sensitivity of the Italian public debt outlook to a new higher interest rate environment, as well as to possible shortfalls from fiscal targets. In terms of long-term solvency, Italy is not close to a precipice and could keep its debt ratio from escalating even if the recent peak interest rates on its debt (about 7 1/2 percent) were to return and persist for a long time (but rise no higher). However, there is a considerable chance that Italy would face a severe liquidity squeeze under these circumstances. It thus behooves the official sector in Europe and internationally to move quickly to provide some credible lender of last resort vehicle in the immediate future.

Suggested Citation

  • William R. Cline, 2012. "Interest Rate Shock and Sustainability of Italy's Sovereign Debt," Policy Briefs PB12-5, Peterson Institute for International Economics.
    • Handle: RePEc:iie:pbrief:pb12-5
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    File URL: https://www.piie.com/publications/policy-briefs/interest-rate-shock-and-sustainability-italys-sovereign-debt
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    1. William R. Cline, 2011. "Sustainability of Greek Public Debt," Policy Briefs PB11-15, Peterson Institute for International Economics.
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    Cited by:

    1. Hellebrandt, T. & Posen, A.S. & Tolle, M., 2012. "Does monetary cooperation or confrontation lead to successful fiscal consolidation?," Financial Stability Review, Banque de France, issue 16, pages 131-142, April.

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