Inflate the Debt Away: Why Are Italian Interest Rates Climbing?

Italian interest rates are climbing because it’s feared that, should Greece leave the euro, Italy might follow suit, making the value of Italian bonds held by investors zero.

That’s right, zero.

Wolfgang Munchau at Spiegel Online explains:

If Greece leaves the euro zone, then owners of Greek bonds will lose their entire investment. At best, the Greeks would pay them back a small part of their investment — in almost worthless drachmas. . . .

So what kind of investor in his or her right mind would purchase Portuguese, Spanish or Italian sovereign bonds in this kind of situation? Not even a yield of 7 percent can make up for all the risk that Italy won’t be able to pay back its debt.

In other words, one way to make a lot of the pain in a euro participating country go away is to do the following:

  • abandon the euro (thereby saddling investors with worthless bonds);
  • print money (thereby inflating the new currency, which also brings debt loads down); and
  • deficit spend (thereby stimulating public investment in a time of low private consumption and investment).

For a southern European politician, this combination of moves—though loathsome—may seem easier, and politically safer, than facing an angry electorate in no mood to see their welfare states dismantled.

This could even be spun as a kind of biblical Jubilee (a national forgiveness of debt). But it could also turn out ruinous (a country upended by hyperinflation).

Below is a visual depiction of Greece’s $500 billion debt. Greece is a country of approximately 10 million people. The government’s debt amounts to $50,000 per person. Italy’s government carries $2 trillion dollars of debt (population: 60 million; $33,000 in debt per person).

The United States’ federal government, if you’re curious, is carrying about $50,000 in debt per person ($15 trillion divided by 300 million people).

Ask not for whom the bell tolls. It tolls for thee.

About Santi Tafarella

I teach writing and literature at Antelope Valley College in California.
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4 Responses to Inflate the Debt Away: Why Are Italian Interest Rates Climbing?

  1. Paradigm says:

    Isn’t the public debt as a percentage of the GDP a better meassure of what kind of shape a country is in? I mean you have to take the debt in relation to the underlying economic strength to tell if a nation is really in trouble or not. According to the Economist Global Debt Clock (http://www.economist.com/content/global_debt_clock) this number is 69 percent for USA, which isn’t great but a lot better than Greece (135) and Italy (120) and a lot of other countries in the EU.

    • santitafarella says:

      Perhaps I’m mistaken, but I think that U.S. debt just recently surpassed 15 trillion (which is roughly the size of the economy). That would yield a number of 100. You’re working with old numbers.

      The thing the U.S. has easy access to that Italy does not is that it can inflate its currency and borrow even more to stimulate growth from the government end.

      Italy has basically tied its monetary policy hands by joining the euro.

      —Santi

    • santitafarella says:

      I you go to the U.S. debt clock, you can see that the federal deficit in red at the upper right is moving marginally faster than the GDP in green at the middle right. The red will pass the green over the next month (if not sooner).

      Nervy.

      http://www.usdebtclock.org/

      • Paradigm says:

        Both clocks are updated but your meassures gross debt mine public. If you click on World debt clocks it puts US public debt/GDP at 85 percent, a lot more than the Economist clock but still not as alarming when compared to similar countries, about the same as France but far from Italy’s 120.

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