Sovereign Debt Sustainability in Italy and Spain: A Probabilistic Approach

31 Pages Posted: 10 Aug 2012

See all articles by William R. Cline

William R. Cline

Peterson Institute for International Economics

Date Written: August 10, 2012

Abstract

This paper introduces a new probabilistic approach to sovereign debt projections and presents new estimates of debt ratios through 2020 for Italy and Spain. The new approach takes account of likely correlations across 243 alternative scenarios with three states (good, baseline, bad) for five key variables (growth, interest rate, primary surplus, bank recapitalization, and privatization). The 25th and 75th percentile scenarios are reported, as are the baseline and probability-weighted outcomes. The results suggest sovereign debt is sustainable in both Italy (where debt ratios are likely to decline because of a high primary surplus) and Spain (where the ratios rise but at a decelerating pace and from relatively low levels).

Keywords: sovereign debt, Italy, Spain, Euro area crisis

JEL Classification: E62, H63, H68

Suggested Citation

Cline, William R., Sovereign Debt Sustainability in Italy and Spain: A Probabilistic Approach (August 10, 2012). Peterson Institute for International Economics Working Paper No. 12-12, Available at SSRN: https://ssrn.com/abstract=2127757 or http://dx.doi.org/10.2139/ssrn.2127757

William R. Cline (Contact Author)

Peterson Institute for International Economics ( email )

1750 Massachusetts Ave NW
Washington, DC 20036
United States
202-454-1320 (Phone)

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