Debt sustainability analysis is back. Sudden shifts in underlying factors may push high-debt countries into a bad equilibrium

Lorenzo Codogno and Giancarlo Corsetti

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: After Covid, the massive EU Recovery Plan aimed to support investment activity through grants and loans at close-to-zero interest rates on expectations that it would boost the economy and enhance potential growth. Meanwhile, the ECB heavily bought government bonds, and interest rates were below zero. Debt sustainability analysis was de facto suspended, and !nancial markets were under anaesthetics. But then the con"ict in Ukraine, the related spike in in"ation, and the turn in the interest rate cycle changed the situation. #e fundamental drivers of debt sustainability are back. Higher interest rates, lower economic growth and the need for !scal support for cyclical and structural reasons may push debt dynamics into bad equilibrium. We look at the Italian situation. Dopo il Covid, l'Unione Europea varava il massiccio Recover Plan allo scopo di sostenere gli investimenti attraverso sovvenzioni e prestiti a tassi di interesse prossimi allo zero, con l'intento di stimolare l'economia e aumentare la crescita potenziale. Nel frattempo, la BCE acquistava massicciamente titoli di Stato e i tassi di interesse erano sotto lo zero. L'analisi della sostenibilità del debito era di fatto sospesa e i mercati !nanziari erano sotto anestesia. Ma poi il con"itto in Ucraina, la relativa impennata dell'in"azione e la svolta nel ciclo dei tassi di interesse hanno cambiato la situazione. I fattori fondamentali per la sostenibilità del debito sono tornati al centro della scena. Tassi d'interesse più alti, crescita economica più bassa e necessità di sostegno !scale per motivi ciclici e strutturali possono spingere le dinamiche del debito verso un cattivo equilibrio. Questo articolo analizza in particolare la situazione italiana.

Keywords: public debt; debt sustainability analysis; fiscal policy; financial crises; economic growth (search for similar items in EconPapers)
JEL-codes: E60 E62 H62 H63 (search for similar items in EconPapers)
Date: 2022-10-01
References: View complete reference list from CitEc
Citations:

Published in Economia Italiana, 1, October, 2022, 2022(2), pp. 121 - 142

Downloads: (external link)
http://eprints.lse.ac.uk/124225/ Open access version. (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:124225

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().