Nouriel Roubini: Italy's Debt Must Be Restructured
Italy's government debt is unsustainable and needs an orderly restructuring to avoid a disorderly default, economist Nouriel Roubini wrote on Tuesday.
Italy, with public debt at 120 percent of gross domestic product, has real interest rates close to five percent and no economic growth. It needs a primary surplus of five percent of GDP – compared with the current near-zero surplus – to stabilize its debt, Roubini said in a blog published on the Financial Times Web site.
"Soon real rates will be higher and growth negative. Moreover, the austerity that the European Central Bank and Germany are imposing on Italy will turn recession into depression," he wrote.
Prime Minister Mario Monti's technocratic government is "much more credible" than Silvio Berlusconi's was, but it faces the same constraints of unsustainable debt and policies to reduce it and they will only make matters worse, according to Roubini. In his opinion, this is why the markets have pushed Italian spreads higher.
"The government is born wounded and weakened, as Mr Berlusconi can pull the plug on it at any time," he wrote.
Italy and countries in a similar position would need a lender of last resort to prevent sovereign spreads "exploding" while they implement reforms and regain market credibility, Roubini said.
But if a lender of last resort were present, "most investors would dump their entire holdings of Italian debt to any sucker – the ECB, European Financial Stability Facility, IMF or whoever – willing to buy it at current yields," he wrote.
"So using precious official resources to prevent the unavoidable would simply finance the exit of others," Roubini added.
To reduce the public debt to 90 percent of GDP, Italy could offer investors the choice to exchange their securities either for a par bond with a longer maturity and a low enough coupon to reduce the net present value by 25 percent, or for a discount bond with a 25 percent reduction in face value, he wrote.
Some Italian politicians have suggested a wealth tax to help cut the public debt, but Roubini said an orderly debt restructuring would be "superior" as the wealth tax would need to raise 30 percent of GDP while restructuring would also involve foreign investors, who hold about 40 percent of Italy's debt.