No miracle needed to stabilize Italian debt

The development of Italian sovereign debt is seen as the main fault line for the euro area in the coming years. The sharp deterioration in the fiscal position has triggered fears that Italian debt has inevitably embarked on an explosive path. Our simulations of the Italian debt dynamics show that these fears are exaggerated. Debt sustainability is inherently forward-looking implying a high degree of uncertainty as there are many “moving parts” that determine in the end the sustainability of debt. Its assessment encompasses various economic as well as political factors. In this report w e provide projections for the Italian debt-to-GDP ratio under a wide variety of scenarios. This scenario playing provides an idea on the potential ranges for Italian debt levels. The fiscal impulse needed to dampen the economic impact of the coronavirus outbreak will dramatically increase Italian debt to 160% in 2020 , from currently 135%, and 152.5% in 2021. Nevertheless, the good news is that Italian debt does not seem to be “out of control” and remains stable , or even improves slightly , over the next decade under reasonable assumptions. That said, it will be also very difficult for Italy to significantly lower its debt level for the foreseeable future. This consequently raises legitimate concerns over the capacity of Italy to withstand a ny new crisis.