The debt dinamics of an economy follow mathmatic rules, were one can show that the debt to gdp ratio falls anytime the economy grows in nominal terms faster than the growth rate of the debt, i.e., the amount of new net debt plus interest.
the important lesson here is that growth used to evaluate the evolution of the debt to gdp is the nominal gdp growth, i.e. real growth + inflation.
that's the reason one economy can monetise and escape from a debt trap by inflating. using this method will penalize all the creditors, because they will receive their money at a later moment, when that money worth less, because its value was lowered by the inflation.
so, is this 7% yield on italian bonds suatentable? is it comparable with similar yields paid by italy in the pre euro area crisis?
The answer for the second question is easy and fast: no! when italy paid 7% (oe more) in the past, during the 90's and before the euro, italy had an inflation rate of more than 5%. So, the italian nominal GDP grew every year more than 5%, only because of the effect of prices (inflation). Even a small real growth was enougth to sustain the debt to gdp at the same level.
So, now one can see that the answer for the first question is more tricky.
if italy pays 7% for its debt, italy will only be able to reduce its debt to gdp ratio (currently at aroun 120%) with nominal gdp growth larger than 7%*120% = 8.4%
but italy has primary surplus, and in the past had ability to hold on budget surplus of around 4% for many years in a row. so the nominal growth rate necessary to achieve a debt to gdp stabilization would be around 4.4%.
with inflation expected to be near, but bellow 2%, italy needs to grow more than 2% in real terms for the next years to avoid the debt trap. That's not easy! but there is still some room for hope: not all the debt italy issued pays 7%. actually, to date only a very small fraction of it is paying that amount (7% which represents about 5% in real terms!!!), so if markets start soon to revert and finance italy at lower rates, there is still hope for italy... or italy may need to adopt any kind of help to stay away from markets (like imf support) or the most probable, the use of the insurrance mechanism of the EFSF that may allow italy to finance itself at slightly lower rates. Italy may also try to roll most of its debt issuing shorter term debt, which seem to have more demand, supported by the ecb ilimited lending facilities, up to 3 years.
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