Interest Rate Shock and Sustainability of Italy's Sovereign Debt
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.
|Date of creation:||Feb 2012|
|Contact details of provider:|| Postal: 1750 Massachusetts Avenue, NW, Washington, DC 20036-1903|
Web page: http://www.piie.com
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- William R. Cline, 2011. "Sustainability of Greek Public Debt," Policy Briefs PB11-15, Peterson Institute for International Economics.