<h2>Background</h2>
<p>Us laymen read all around that Italy's weak economy and its high government debt/high debt to GDP ratio is threatening the financial stability and health of Eurozone and EU. However, little is being explained by experts what exactly the real risk level is and various mechanisms either already in place or conceivably considerable are not sufficient to mitigate the risk. I am trying to understand this from an expert and non-partisan perspective.</p>
<h2>Questions</h2>
<p>From my perspective, the main question can be broken down into sub-questions, answers to which could help better understand the bigger picture.</p>
<ol>
<li><em>Under current circumstances, what is the level of government debt to GDP at which Italy would likely default on its obligations?</em></li>
<li><em>If it comes to such a default, how will we recognise it?</em> I.e., what event/non-event would be an indicator of it happening and what are the timepoints to watch? (I guess scheduled moments of interest installments, or something like that could be such moments)</li>
<li><em>What options would the Bank of Italy have at that point to mitigate the crisis?</em></li>
<li><em>What options would Italian government have at that point to mitigate the crisis?</em></li>
<li><em>What options would European Central Bank have at that point to mitigate the crisis?</em></li>
<li><em>What options would European Commission and European Council have at that point to mitigate the crisis?</em></li>
<li><em>If despite all the doom and gloom Italy's default is unlikely (because for instance the existing policies might as well work, or such), what are exactly the policies/mechanisms/events which would prevent the country to default?</em></li>
</ol>
<h2>Disclaimer</h2>
<ul>
<li>My background is not in economy, so in the case I posed my question with flaws, I would appreciate help to improve it.</li>
<li>To put a break on speculation, let's assume that Italy leaving EU, or a scenario like that is out of question (barring sub-question 6).</li>
<li>Just to stress: I very well understand this site is not for speculative questions, but since my question is about a possible future scenario (which clearly many serious economists consider realistic and likely), it is by necessity somewhat speculative. Therefore I am asking about current legal/political framework and reality to be considered/executed at some future time point. That is, I am asking about viable options, not some fantastic scenarios.</li>
</ul>

CC BY-SA 4.0
2021-01-10T23:19:16.757Z
I think this is too opinion based to be on topic on our form plus you are asking too many questions at the same time
1muflon1
CC BY-SA 4.0
2021-01-11T08:55:36.213Z
@1muflon1 I am looking for genuine expertise - whatever modern science of economy can tell us. I do not care for opinions, I have my own too. Can you help me to disassemble this into "answerable" question then? Also, is there a meta resource on how to ask questions about "future" so as to encourage non-opinionated answers? After all isn't all economy's usefulness about building models to helps us to predict future?
walkmanyi
CC BY-SA 4.0
2021-01-11T12:49:29.610Z
but this is too speculative. Honest answer to 1 is nobody really knows. Somewhere between 150-350 debt to GDP I guess. 2. Is trivial country defaults when it refuses to pay some of its debt that is it. 3. Almost none - bank holiday perhaps. 4. Well at a point of default only to appeal to EU for help. 5. ECB can monetize the debt. 6. EC could decide to borrow them more/issue European bonds. 7. Reduce debt to GDP - this can be done via growth or less spending - this last one would be interesting econ question on its own but it is too broad
1muflon1
CC BY-SA 4.0
2021-01-11T13:19:22.127Z
@1muflon1 so you are suggesting that modern economic theory has little to say about this? That in itself is interesting answer I think. I would guess the answer to 1 could go like this: X is Italy expenditure supported by their taxes, Y is the upper bound of what they can borrow on the market (with all the uncertainty of that), Z are payments they have to make, so they run out of money between A and B events. I imagined something along those lines.
walkmanyi
CC BY-SA 4.0
2021-01-11T13:21:05.743Z
@1muflon1 re 2: my intuition is that a country can refuse to pay its debts because of politics, but there probably are situations where it simply cannot even if it wanted to. At that moment it's a cold fact. That was what I thought I could get. And similarly for the other sub-questions.
walkmanyi
CC BY-SA 4.0
2021-01-11T13:22:22.670Z
@1muflon1 re 5: can it? I would like to know.
walkmanyi
CC BY-SA 4.0
2021-01-11T13:24:33.760Z
there is a lot of literature on defaults and so on but asking what threshold will result to default is like asking at what day some person will die, well based on what we know about modern medicine expected human lifespan is 80 years but due to possibility of accidents etc we can for sure say someone will die between now and and when they are at about 115 years. There is so much uncertainty and variables there that it’s hard to say. For example, if ECB would decide to pursue extremely loose monetary policy and commit to always buy Italian bonds arbitrary high debt to gdp is possible
1muflon1
CC BY-SA 4.0
2021-01-11T13:28:02.553Z
yes exactly country can arbitrary refuse to pay debt because of politics - this is why it is not good fit for SE in my opinion. Default could happen at a whim of politicians if they would want to. From economic perspective default is inevitable only when debt grows more quickly than economy, as at that point debt is on explosive path but politicians can always decide to decrease spending or increase taxes - if they don’t do that it’s political decision again - so not something economist can help you with. Only true inevitable economic default is when the debt is so big
1muflon1
CC BY-SA 4.0
2021-01-11T13:29:43.703Z
That even at maximum possible taxes and minimum possible government spending it would still grow due to interest payment- but I don’t think any country ever was at that point. Usually default is simply political decision when it’s better to just default for debt because country leaders can’t justify less spending and more taxes to people - but this is more politics than economics.
1muflon1
CC BY-SA 4.0
2021-01-11T13:32:59.803Z
5. Well legally it’s questionable but laws governing of how ECB works can be amended if politicians will want to (again economists can’t tell you what politicians will do thats question for political science). From economic perspective it can buy unlimited amount of Italy gov bonds and then just say Italy does not need to pay them (it would not be default because here debt holder declares borrower does not need pay back). It would lead to inflation and it’s no free lunch but economically any amount of debt can be get rid of this way. In fact country that has support of central bank can choose
1muflon1
CC BY-SA 4.0
2021-01-11T13:36:24.810Z
to never default and support arbitrary high debt to gdp ratio by monetizing debt (even though at some point inflation will be so high that economically just defaulting would be better option). Again this will be decided by politics in the end.
1muflon1
CC BY-SA 4.0
2021-01-11T14:17:37.930Z
@1muflon1 thank you very much for your comments. I find all this very insightful already. Would you be able (and wiling) to respond with a proper answer explaining why the questions I ask cannot be easily answered in a rigorous manner? From a layman's perspective, this is actually useful knowledge - even if it perhaps sounds trivial to economists. We, outside folks, read in the news that "Italy's default is inevitable", but from your comments I understand that it is not a strict necessity. And that is highly informative.
walkmanyi
<government-debt><default><euro-area><eu><italy>
What exactly is the risk Italy's high debt to GDP ratio poses to Eurozone and EU?
walkmanyi
# What exactly is the risk Italy's high debt to GDP ratio poses to Eurozone and EU?

(Asked by: username_0 on 2021-01-10)

## Background

Us laymen read all around that Italy's weak economy and its high government debt/high debt to GDP ratio is threatening the financial stability and health of Eurozone and EU. However, little is being explained by experts what exactly the real risk level is and various mechanisms either already in place or conceivably considerable are not sufficient to mitigate the risk. I am trying to understand this from an expert and non-partisan perspective.

## Questions

From my perspective, the main question can be broken down into sub-questions, answers to which could help better understand the bigger picture.

1. *Under current circumstances, what is the level of government debt to GDP at which Italy would likely default on its obligations?*
2. *If it comes to such a default, how will we recognise it?* I.e., what event/non-event would be an indicator of it happening and what are the timepoints to watch? (I guess scheduled moments of interest installments, or something like that could be such moments)
3. *What options would the Bank of Italy have at that point to mitigate the crisis?*
4. *What options would Italian government have at that point to mitigate the crisis?*
5. *What options would European Central Bank have at that point to mitigate the crisis?*
6. *What options would European Commission and European Council have at that point to mitigate the crisis?*
7. *If despite all the doom and gloom Italy's default is unlikely (because for instance the existing policies might as well work, or such), what are exactly the policies/mechanisms/events which would prevent the country to default?*

## Disclaimer

* My background is not in economy, so in the case I posed my question with flaws, I would appreciate help to improve it.
* To put a break on speculation, let's assume that Italy leaving EU, or a scenario like that is out of question (barring sub-question 6).
* Just to stress: I very well understand this site is not for speculative questions, but since my question is about a possible future scenario (which clearly many serious economists consider realistic and likely), it is by necessity somewhat speculative. Therefore I am asking about current legal/political framework and reality to be considered/executed at some future time point. That is, I am asking about viable options, not some fantastic scenarios.

**Tags:** government-debt, default, euro-area, eu, italy

> **Comments:**
> **username_1**: I think this is too opinion based to be on topic on our form plus you are asking too many questions at the same time  
> **username_0**: @username_1 I am looking for genuine expertise - whatever modern science of economy can tell us. I do not care for opinions, I have my own too. Can you help me to disassemble this into "answerable" question then? Also, is there a meta resource on how to ask questions about "future" so as to encourage non-opinionated answers? After all isn't all economy's usefulness about building models to helps us to predict future?  
> **username_1**: but this is too speculative. Honest answer to 1 is nobody really knows. Somewhere between 150-350 debt to GDP I guess. 2. Is trivial country defaults when it refuses to pay some of its debt that is it. 3. Almost none - bank holiday perhaps. 4. Well at a point of default only to appeal to EU for help. 5. ECB can monetize the debt. 6. EC could decide to borrow them more/issue European bonds. 7. Reduce debt to GDP - this can be done via growth or less spending - this last one would be interesting econ question on its own but it is too broad  
> **username_0**: @username_1 so you are suggesting that modern economic theory has little to say about this? That in itself is interesting answer I think. I would guess the answer to 1 could go like this: X is Italy expenditure supported by their taxes, Y is the upper bound of what they can borrow on the market (with all the uncertainty of that), Z are payments they have to make, so they run out of money between A and B events. I imagined something along those lines.  
> **username_0**: @username_1 re 2: my intuition is that a country can refuse to pay its debts because of politics, but there probably are situations where it simply cannot even if it wanted to. At that moment it's a cold fact. That was what I thought I could get. And similarly for the other sub-questions.  
> **username_0**: @username_1 re 5: can it? I would like to know.  
> **username_1**: there is a lot of literature on defaults and so on but asking what threshold will result to default is like asking at what day some person will die, well based on what we know about modern medicine expected human lifespan is 80 years but due to possibility of accidents etc we can for sure say someone will die between now and and when they are at about 115 years. There is so much uncertainty and variables there that it’s hard to say. For example, if ECB would decide to pursue extremely loose monetary policy and commit to always buy Italian bonds arbitrary high debt to gdp is possible  
> **username_1**: yes exactly country can arbitrary refuse to pay debt because of politics - this is why it is not good fit for SE in my opinion. Default could happen at a whim of politicians if they would want to. From economic perspective default is inevitable only when debt grows more quickly than economy, as at that point debt is on explosive path but politicians can always decide to decrease spending or increase taxes - if they don’t do that it’s political decision again - so not something economist can help you with. Only true inevitable economic default is when the debt is so big  
> **username_1**: That even at maximum possible taxes and minimum possible government spending it would still grow due to interest payment- but I don’t think any country ever was at that point. Usually default is simply political decision when it’s better to just default for debt because country leaders can’t justify less spending and more taxes to people - but this is more politics than economics.  
> **username_1**: 5. Well legally it’s questionable but laws governing of how ECB works can be amended if politicians will want to (again economists can’t tell you what politicians will do thats question for political science). From economic perspective it can buy unlimited amount of Italy gov bonds and then just say Italy does not need to pay them (it would not be default because here debt holder declares borrower does not need pay back). It would lead to inflation and it’s no free lunch but economically any amount of debt can be get rid of this way. In fact country that has support of central bank can choose  
> **username_1**: to never default and support arbitrary high debt to gdp ratio by monetizing debt (even though at some point inflation will be so high that economically just defaulting would be better option). Again this will be decided by politics in the end.  
> **username_0**: @username_1 thank you very much for your comments. I find all this very insightful already. Would you be able (and wiling) to respond with a proper answer explaining why the questions I ask cannot be easily answered in a rigorous manner? From a layman's perspective, this is actually useful knowledge - even if it perhaps sounds trivial to economists. We, outside folks, read in the news that "Italy's default is inevitable", but from your comments I understand that it is not a strict necessity. And that is highly informative.  

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## 0 answers

