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Sovereign Debt Sustainability in Italy and Spain: A Probabilistic Approach

  • William R. Cline

    ()

    (Peterson Institute for International Economics)

This paper introduces a new probabilistic approach to sovereign debt projections and presents new estimates of debt ratios through 2020 for Italy and Spain. The new approach takes account of likely correlations across 243 alternative scenarios with three states (good, baseline, bad) for five key variables (growth, interest rate, primary surplus, bank recapitalization, and privatization). The 25th and 75th percentile scenarios are reported, as are the baseline and probability-weighted outcomes. The results suggest sovereign debt is sustainable in both Italy (where debt ratios are likely to decline because of a high primary surplus) and Spain (where the ratios rise but at a decelerating pace and from relatively low levels).

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File URL: http://www.piie.com/publications/wp/wp12-12.pdf
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Paper provided by Peterson Institute for International Economics in its series Working Paper Series with number WP12-12.

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Date of creation: Aug 2012
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Handle: RePEc:iie:wpaper:wp12-12
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  1. William R. Cline, 2011. "Sustainability of Greek Public Debt," Policy Briefs PB11-15, Peterson Institute for International Economics.
  2. William R. Cline, 2012. "Resolving the European Debt Crisis," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 6420 edited by Guntram B. Wolff, March.
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