Debt sustainability analysis is back. Sudden shifts in underlying factors may push high-debt countries into a bad equilibrium

Codogno, Lorenzo and Corsetti, Giancarlo (2022) Debt sustainability analysis is back. Sudden shifts in underlying factors may push high-debt countries into a bad equilibrium. Economia Italiana, 2022 (2). 121 - 142.

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Abstract

After Covid, the massive EU Recovery Plan aimed to support investment activity through grants and loans at close-to-zero interest rates on expectations that it would boost the economy and enhance potential growth. Meanwhile, the ECB heavily bought government bonds, and interest rates were below zero. Debt sustainability analysis was de facto suspended, and !nancial markets were under anaesthetics. But then the con"ict in Ukraine, the related spike in in"ation, and the turn in the interest rate cycle changed the situation. #e fundamental drivers of debt sustainability are back. Higher interest rates, lower economic growth and the need for !scal support for cyclical and structural reasons may push debt dynamics into bad equilibrium. We look at the Italian situation. Dopo il Covid, l'Unione Europea varava il massiccio Recover Plan allo scopo di sostenere gli investimenti attraverso sovvenzioni e prestiti a tassi di interesse prossimi allo zero, con l'intento di stimolare l'economia e aumentare la crescita potenziale. Nel frattempo, la BCE acquistava massicciamente titoli di Stato e i tassi di interesse erano sotto lo zero. L'analisi della sostenibilità del debito era di fatto sospesa e i mercati !nanziari erano sotto anestesia. Ma poi il con"itto in Ucraina, la relativa impennata dell'in"azione e la svolta nel ciclo dei tassi di interesse hanno cambiato la situazione. I fattori fondamentali per la sostenibilità del debito sono tornati al centro della scena. Tassi d'interesse più alti, crescita economica più bassa e necessità di sostegno !scale per motivi ciclici e strutturali possono spingere le dinamiche del debito verso un cattivo equilibrio. Questo articolo analizza in particolare la situazione italiana.

Item Type:	Article
Official URL:	https://economiaitaliana.org/pubblicazioni/page/2/
Additional Information:	© 2024 Economia Italiana
Divisions:	European Institute
Subjects:	H Social Sciences > HG Finance H Social Sciences > HB Economic Theory
JEL classification:	E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E60 - General E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E62 - Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation H - Public Economics > H6 - National Budget, Deficit, and Debt > H62 - Deficit; Surplus H - Public Economics > H6 - National Budget, Deficit, and Debt > H63 - Debt; Debt Management
Date Deposited:	12 Jul 2024 11:03
Last Modified:	12 Dec 2024 04:22
URI:	http://eprints.lse.ac.uk/id/eprint/124225

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