What happens if italy defaults

That is by far the country's highest debt level on record. If it engages in budget austerity, it risks deepening its economic recession and further eroding its tax base. But if it does nothing to reduce its budget deficit, its debt level will keep rising.

In this context, the growing public discontent with the Conte government over the pandemic's recent resurgence does not bode well for Italian political stability in the year ahead. In , the Obama administration was caught flatfooted by the Greek sovereign debt crisis that roiled global financial markets.

Desmond Lachman is a resident fellow at the American Enterprise Institute. Later, the market would have forced the Eurolira to devaluate in an unpredictable measure. The drop in the value of the new currency would have depended on what mechanism was chosen for restructuring the public debt. It was considered essential that Italy avoid resorting to foreign investors in order to prevent an even more dramatic devaluation. One option was not to change the nominal value of bonds, but to announce a major sale of publicly-held goods and firms, coupled with a consistent wealth tax on financial assets held in bank accounts.

However, avoiding a declaration of default would have almost been impossible. In fact, the most dramatic consequence of Italexit would have been the constant litigation over every single measure undertaken by the government. A long technical annex to the document describes a daunting scenario of legal controversies, lasting years, that would have made the whole operation completely unrealistic and doomed to catastrophic consequences that would have reverberated even beyond the euro area.

Finally, there are two versions of the document: a preparatory one started in , and the final one dated July 27, Anti-European rhetoric among Italian leaders is also a political diversion away from taking stock of the reforms that the country needs.

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