Credible assumptions for
inflation, GDP growth and primary budget deficits in Italy imply that either
the Debt-to-GDP ratio in Italy would increase sharply if Italian
interest rates on 10-year government debt remained at the November 30
level of around 7 percent or Italy would lose access to the bond
market.
Responses
Absent outside help to deal
with runs, such as a pledge of fiscal support from Germany or an unlimited
commitment by the ECB to buy bonds, there is no spending-and-tax plan
Italy can announce that would be credible enough
to hold its interest rates low enough to stabilize its
Debt-to-GDP ratio.