Between 2009 and 2012, the eurozone experienced a sovereign debt crisis that threatened to tear its monetary union apart.
Lenders to European financial markets lost faith in the fiscal sustainability of several member states and started demanding higher yields to compensate for heightened risk. Borrowing costs soared. The affected sovereigns quickly found themselves unable to repay the debts they incurred during the Great Recession in the late 2000s. A negative feedback loop pushed Greece, Portugal, Ireland, and Cyprus to the brink of a euro exit.
Italy could be the starting point for another debt crisis. At 150% of its GDP, Italy’s public debt has reached its highest level on record. The country's economy is being battered by the European Central Bank’s shift to a more restrictive monetary policy to fight inflation. Last week, the European Central Bank increased its three key interest rates by 75 basis points, the largest increase since 1999. Italy faces a cold winter. Over 40% of its energy is derived from Russian natural gas.
Until now, Italy has been kept afloat by large-scale European Central Bank purchases of Italian government debt under its Pandemic Emergency Purchase Program. In 2020 and 2021, the ECB bought the entirety of the Italian government’s net debt issuance. Unfortunately for Italy, the ECB’s bond buying under that program has ended as part of the bank’s shift toward a more restrictive monetary policy to deal with Europe’s inflation problem.
Among them are the need for the ECB to be satisfied that the country is managing its public finances properly and that its public debt is on a sustainable path. Those conditions might be difficult for a populist government which has as one of its own goals, reducing the power of the EU bureaucracy.
France Dernières Nouvelles, France Actualités
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