The Gloomy Scenario of Italy's Default
ECMI Commentary, No. 31, December 2011
5 Pages Posted: 18 Dec 2011
Date Written: December 16, 2011
What will happen if Italy is not able to implement structural reforms and if international institutions, such as the EFSF and the IMF, do not intervene with sufficient resources to prevent Europe’s second-largest economy from defaulting on its debt? The potential costs of such a scenario are, as of today, unquantifiable. But what we can anticipate is that the Italian economic system would certainly embark on a perverse path that would follow three phases: liquidity crisis and insolvency; deflationary pressures; and finally inflationary pressures and economic and political instability.
Keywords: Eurozone debt crisis, sovereign default, public finance
JEL Classification: E60, E61, E62, F30, H60, H63
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