Italy must restructure debt now, says leading US economist

Italy should restructure its debt immediately, as alternative measures already suggested to lower its debt burden risk turning its recession into a depression, says Nouriel Roubini, professor of the Stern School of Business at New York University.

Writing in the Financial Times today, Stern said Italy’s debt should be restructured from 120% of GDP to, at worst, 90% of GDP.

To do this, he said bond holders could be offered an exchange of their holdings for a par bond with long enough maturity and low enough coupon, or a ‘discount bond’ with a face value 25% lower than what they hold.

The second option might suit banks that do not mark such holdings to market, Roubini said.

Another option mentioned to cut the debt burden is to raise a wealth tax.

But a tax large enough to reduce Italy’s debt ratio to 90% of GDP would need to raise €450bn, or nearly one third of GDP. Even spreading this tax over 10 years would mean increasing taxes to 3% of GDP each year.

“The resulting drop in disposable income and consumption would make Italy’s recession a depression,” Roubini wrote.

Another alternative, austerity, also risks turning a recession into something much worse.

Roubini said Italy, together with Spain and Belgium, would need €2trn to backstop their debt to 2014 – far more than the proposed expansion of the bail out fund to €1trn, which eurozone finance ministers yesterday failed to agree.

 

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