Starting from the idea that Italy’s public debt un-sustainability is a fact increasingly clear, the economist Nouriel Roubini, also called “Doctor Doom”, made for the Financial Times an analysis which shows that the only solution to avoid a new European sovereign debt crises (as was that of Greece) is restructuring 25% of the Italy’s debt. Restructuring involves the acceptance from private funders of new losses. Italy’s public debt, amounting to 1,900 billion euros, representing 120% of GDP should be reduced rapidly to a rate of 90% of GDP, in order to be supported in the future by the Italian economy. This will however be possible only by involving the private sector using the model of Greece, meaning that the debt should be reduced by up to 25%, according to economist Nouriel Roubini. And since 40% of the debt is held by foreign creditors, some costs will be incurred by them as well.
The problem is that eurozone leaders do not want to involve the private sector in these matters, including EFSF stability fund. But soon, they will have no choice. Whatever what means of financing they will find next year, Italy needs a 5% annual growth to stabilize its sovereign debt. But Italian GDP growth is close to zero now, and implementation of reforms and austerity measures demanded by the European Commission will create a greater pressure in the coming years on consumption and GDP growth.
This means that Italy is moving towards recession, which could turn into economic depression (yearly drop in the medium or long term). The plan currently circulated by European officials implies financing the amount that Italy needs to pay back next year, about 400 billion euros. But the European Central Bank does not intend to be (directly or through EFSF) the lender of “last resort”, i.e. the institution that give the guaranteed funds when no other lender is found. Therefore Italy will continue to borrow at high interest rates for current needs, possibly unsustainable.
Thus, even if it will find money for refinancing (from the ECB, IMF or EFSF), Italy will still have to reach a debt restructuring or to obtain large amounts from internal taxation. One of the plans would be to increase taxes for the rich (including corporations and financial institutions). However, according to calculations made by Roubini, wealth tax should raise 450 billion euros in order to reduce debt to 90% of GDP, a sum which would lead to extremely severe reduction in consumption even if for a ten-year span.
The risks that Dr. Doom has not mentioned are those related to roll this way of reducing public debt, which may be required by other countries with problems (Spain, Belgium, etc.). And private donors would become very angry when the question to buy government bonds will be raised, which would lead to increased interest required of all states in the European Union. This means that in this case the European Central Bank should become the main guarantor of bond issues, an option which the Germans do not support (yet).