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Background

Us laymen read all around that Italy's weak economy and its high government debt/high debt to GDP ratio is threatening the financial stability and health of Eurozone and EU. However, little is being explained by experts what exactly the real risk level is and various mechanisms either already in place or conceivably considerable are not sufficient to mitigate the risk. I am trying to understand this from an expert and non-partisan perspective.

Questions

From my perspective, the main question can be broken down into sub-questions, answers to which could help better understand the bigger picture.

  1. Under current circumstances, what is the level of government debt to GDP at which Italy would likely default on its obligations?
  2. If it comes to such a default, how will we recognise it? I.e., what event/non-event would be an indicator of it happening and what are the timepoints to watch? (I guess scheduled moments of interest installments, or something like that could be such moments)
  3. What options would the Bank of Italy have at that point to mitigate the crisis?
  4. What options would Italian government have at that point to mitigate the crisis?
  5. What options would European Central Bank have at that point to mitigate the crisis?
  6. What options would European Commission and European Council have at that point to mitigate the crisis?
  7. If despite all the doom and gloom Italy's default is unlikely (because for instance the existing policies might as well work, or such), what are exactly the policies/mechanisms/events which would prevent the country to default?

Disclaimer

  • My background is not in economy, so in the case I posed my question with flaws, I would appreciate help to improve it.
  • To put a break on speculation, let's assume that Italy leaving EU, or a scenario like that is out of question (barring sub-question 6).
  • Just to stress: I very well understand this site is not for speculative questions, but since my question is about a possible future scenario (which clearly many serious economists consider realistic and likely), it is by necessity somewhat speculative. Therefore I am asking about current legal/political framework and reality to be considered/executed at some future time point. That is, I am asking about viable options, not some fantastic scenarios.
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  • $\begingroup$ I think this is too opinion based to be on topic on our form plus you are asking too many questions at the same time $\endgroup$
    – 1muflon1 ♦
    Jan 10, 2021 at 23:19
  • $\begingroup$ @1muflon1 I am looking for genuine expertise - whatever modern science of economy can tell us. I do not care for opinions, I have my own too. Can you help me to disassemble this into "answerable" question then? Also, is there a meta resource on how to ask questions about "future" so as to encourage non-opinionated answers? After all isn't all economy's usefulness about building models to helps us to predict future? $\endgroup$
    – walkmanyi
    Jan 11, 2021 at 8:55
  • $\begingroup$ but this is too speculative. Honest answer to 1 is nobody really knows. Somewhere between 150-350 debt to GDP I guess. 2. Is trivial country defaults when it refuses to pay some of its debt that is it. 3. Almost none - bank holiday perhaps. 4. Well at a point of default only to appeal to EU for help. 5. ECB can monetize the debt. 6. EC could decide to borrow them more/issue European bonds. 7. Reduce debt to GDP - this can be done via growth or less spending - this last one would be interesting econ question on its own but it is too broad $\endgroup$
    – 1muflon1 ♦
    Jan 11, 2021 at 12:49
  • $\begingroup$ @1muflon1 so you are suggesting that modern economic theory has little to say about this? That in itself is interesting answer I think. I would guess the answer to 1 could go like this: X is Italy expenditure supported by their taxes, Y is the upper bound of what they can borrow on the market (with all the uncertainty of that), Z are payments they have to make, so they run out of money between A and B events. I imagined something along those lines. $\endgroup$
    – walkmanyi
    Jan 11, 2021 at 13:19
  • $\begingroup$ @1muflon1 re 2: my intuition is that a country can refuse to pay its debts because of politics, but there probably are situations where it simply cannot even if it wanted to. At that moment it's a cold fact. That was what I thought I could get. And similarly for the other sub-questions. $\endgroup$
    – walkmanyi
    Jan 11, 2021 at 13:21

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