Tags: Roubini | Italy | Default

Roubini: Italy Needs Drastic Moves to Avoid Default

Wednesday, 30 Nov 2011 08:01 AM

Italy should be allowed to restructure its debts right now in an orderly fashion to avoid a messy default that would damage an already recession-bound Europe, says New York University economist Nouriel Roubini.

With public debt running at 120 percent of gross domestic product, real interest rates near five percent and no economic growth, Italy needs an orderly restructuring.

The country would need to run a primary surplus of five percent of GDP – compared with the current near-zero surplus – just to stabilize its debt, Roubini writes in a Financial Times blog.
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"Soon real rates will be higher and growth negative. Moreover, the austerity that the European Central Bank and Germany are imposing on Italy will turn recession into depression," Roubini writes.

roubinigetty200.jpg
Nouriel Roubini
(Getty Images photo)
"Even if austerity and reforms were to restore debt sustainability, Italy and countries in a similar position would need a lender of last resort to support them and prevent sovereign spreads exploding while they regained market credibility."

However, if a lender of last resort were to emerge, such as the European Central Bank (ECB) that would step in and buy Italian debt, "most investors would dump their entire holdings of Italian debt to any sucker – the ECB, European Financial Stability Facility, IMF or whoever – willing to buy it at current yields," Roubini adds.

"So using precious official resources to prevent the unavoidable would simply finance the exit of others."

European leaders are hammering the ECB or the International Monetary Fund to step in and alleviate the crisis.

"There is some room also for the European Central Bank to maneuver," says Swedish Finance Minister Anders Borg, according to the AFP newswire.

"We need to keep all options on the table."

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Italy should be allowed to restructure its debts right now in an orderly fashion to avoid a messy default that would damage an already recession-bound Europe, says New York University economist Nouriel Roubini. With public debt running at 120 percent of gross domestic...
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2011-01-30
Wednesday, 30 Nov 2011 08:01 AM
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