Restructuring or not restructuring Italian debt? Friedrich Heinemann of Zew in Mannheim, told the FAZ: "When the acute phase of the crisis is over in 2022, we will need an international conference on Italian public debt. And of course, the holders of the securities will have to play their part and partially waive their claims". Hans Werner Sinn also agrees that Italian government bond holders should pick up the bill for the crisis. Lars Feld, the German government advisor, on the other hand, is much more cautious and tends to rule out a cut in Italy's public debt. From the FAZ and Germany comes yet another pistolotto on the restructuring of Italian debt.
(...) The starting situation is therefore rather gloomy. The question now is: does Italy really need a debt cut to solve its problems?. In any case, such a step should no longer be considered taboo, recommends Hans-Werner Sinn, former president of the Ifo Institute in Munich. "As much as I am in favour of generous financial aid to Italy, it is unacceptable that Italian and foreign creditors are constantly being saved by European taxpayers instead of participating in the losses themselves," says the economist. Sinn refers to the "Paris Club", an informal club for international negotiations in which such debt cancellations are usually regulated. "There are proven rules for orderly debt restructuring". Since the Second World War onwards, Sinn argues, there have been about 180 debt restructurings. "And the world is not yet over." Even in the eurozone, a partial debt cut for Italy would be nothing new. In the case of Greece, in fact, a debt cut has already been made during the euro crisis of 2012, and it was one of the biggest in the history of finance. To these were added controls on capital movements. "I'm afraid that sooner or later we will have to use them in the case of Italy too, because the rescue packages won't last long," says Sinn.
And this is also the opinion of Friedrich Heinemann, public finance expert at the ZEW economic research institute in Mannheim: "the Reconstruction Fund will ultimately not be able to solve Italy's dramatic financial problems". The money to be mobilised for aid is enormous - but it will never be enough for Italy. Much more important for Italy, he says, is that the European Central Bank (ECB) continues to diligently subscribe to the new government bonds that the Finance Minister in Rome continues to issue on the markets. But ultimately, it will be European taxpayers who will be responsible for the growing risks to the ECB's balance sheet.
Like Hans-Werner Sinn, Heinemann believes that there is no way to avoid a cut in Italy's public debt. "The debt is too high, the country cannot get out of it," says the ZEW economist. "When the acute crisis is over in 2022, we will need an international conference on Italian public debt. And, of course, the holders of securities will have to do their part and give up some of their credits". Heinemann wants creditors to pick up the bill too.
But there are other experts who see things differently. "Italy doesn't need a debt cut," says Lars Feld. The economist from Freiburg chairs the Council of Economic Wise Men, whose task is to advise the federal government. In Greece, debt reduction was inevitable at the time, but this comparison is misleading, explains Feld: "Italy has a completely different economic consistency. If the Italian government finally tackled the necessary reforms with determination, considerable forces could be unleashed in terms of economic growth". He is counting on the country to get out of its current debt situation, as economic growth would be able to generate more tax revenue.
A debt cut, on the other hand, would probably do more harm than good, Feld points out: "Once the debts are paid off, the pressure to tackle the reforms needed for growth would also decrease. And this is the exact opposite of what Italy needs". Greece is a cautionary example: the debt cut of eight years ago has only temporarily reduced the country's debt ratio. In the absence of economic growth, it rose again very rapidly - and now it is even higher than before the debt cancellation.
In the case of Italy, Feld also considers a debt cut to be too risky. The main problem is that the largest creditors of the Italian state remain by far the Italian banks, which have huge amounts of government bonds and claims on state institutions on their balance sheets. In the middle of last year, Italian banks were creditors to the Italian state for a total of EURÂ 690Â billion. If these securities were to be written off as part of a restructuring of public debt, many banks would end up in difficulty.
"We would immediately have a banking crisis in Italy, which would spread to other European countries because of the close ties that have been created," says Feld. French banks, in particular, have high claims on Italy and would suffer massive losses. But it's not just the banks. Insurance companies, investment funds and other major investors are also creditors of the Italian state and would therefore be affected by debt restructuring.
Once again, that of Greece was a cautionary example: the restructuring of the country's debt in spring 2012 brought panic to the markets, at an already very critical stage. "Looking back, it has to be said that the cut accelerated the Eurocrisis fire," even Heinemann of ZEW, a supporter of a debt cut, admits. That is why he would not immediately convene the "international conference on Italian debt" that he recommended, but would only do so in the following year - and even then he would only put only part of the burden of restructuring on the creditors holding the bonds. "Now, in the middle of the economic crisis, you can't do that. The markets are too fragile for such a choice".
Hans-Werner Sinn does not deny the risk of a financial crisis associated with a debt cut, but believes that this risk is the lesser of the two evils. France is strong enough to support its banks in an emergency, he says. Ultimately, it's a matter of weighing the risks - and politicians lack foresight in this regard: "They are always afraid of short-term risks for the financial markets and in return accept risks that are much more threatening in the long term," Sinn criticizes. "The rescue of creditors by pooling debt erodes states and creates the danger of a huge debt war in Europe, which could bring down the EU.
But one thing must be clear: even if there were no new financial crisis in Europe, a cut in Italy's public debt would probably not be free for German taxpayers anyway. Because in recent years the ECB has bought mountains of Italian government bonds, and even the central bank would inevitably be hit by a debt cut. Germany would have to bear some of these losses. "The Bundesbank would then have to be recapitalized by the German state," says Sinn. In extreme cases, this could cost up to 150 billion euros.
What is the conclusion? The arguments of both sides can be summed up roughly as follows: a debt cut for a large country like Italy would be a radical relaunch, after ten years in which taxpayers have directly or indirectly incurred very high costs for bailouts in the eurozone. But the risks of this change of course would be considerable. And whether debt relief can really help Italy and the other euro countries in the long term is not at all certain. "There is no easy way out," says Hans-Werner Sinn. "We're really bogged down.
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