Avoiding an Ita…

Avoiding an Italian bailout: Why and how

 
Spain has no options, but Italy does.

  • Spain will have to accept EFSF conditionality in order to persuade the ECB to buy its bonds.
  • Italy is different; Italy should not bow to the EFSF and submit itself to its conditionality in order to persuade the ECB to buy its bonds.

Spain may have no other option than to turn to the EFSF and the ECB for assistance: Italy has, and should pursue them. By going to the EFSF together with Spain – as many in the markets are advising – the two countries would be put in the same basket, one in which Italy does not belong.
Italy can and should avoid engaging with the EFSF for two reasons.
First, Italy’s economic situation is very different from Spain’s.

  • There was no real estate bubble; Italian banks are weakened by the recession but their balance sheets do not bear the legacy of piles of mortgages gone sour.
  • At 123% of GDP, public debt is extremely high, but the government runs a primary surplus – 3.4% of GDP this year – while Spain has a primary deficits of 3.3% (1.9% in France).
  • Italy’s net external position is balanced which Spain run current account deficits close to 10% of GDP per year over a decade.
  • If Italians were to swap their foreign assets with the government bonds held abroad, Italy would look like Japan: a high-debt country but one in which all of the debt is held domestically.

Read more: http://www.voxeu.org/article/avoiding-italian-bailout-why-and-how

Advertisements
Previous Post
Leave a comment

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: