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Italy’s public debt: new challenges brought on by the COVID-19 crisis

Italy’s public debt: new challenges brought on by the COVID-19 crisis

The COVID-19 crisis will weigh heavily on global public-debt dynamics. This constitutes a vulnerability, particularly for Italy. In this note, we provide an assessment of the consequences for Italy of running a higher public-debt/GDP ratio and update our debt sustainability analysis. Our main conclusion is as follows: 1. a more-favorable starting point in terms of interest rates mitigates the risk related to an increase in the fiscal burden of debt; and 2. despite its higher level, Italy’s public-debt/GDP ratio is projected to decline if interest rates align with market expectations. We conclude by explaining how Italy could benefit from a decision to activate the European Stability Mechanism’s (ESM) Pandemic Crisis Support and from a contribution from the European Commission’s (EC) Next Generation EU instrument. The role Italy decides to have in Europe will contribute to shaping its debt dynamic in the long run