One of the persistent fears about the European crisis is that the euro zone partners won’t be able to save Italy and Spain if there’s a run on their sovereign bonds.
But a study released Wednesday by the Washington-based Peterson Institute for International Economics offers some hope. Based on a “probabilistic approach to sovereign debt projections,” senior fellow William Cline concludes that the sovereign debt of both countries is sustainable.
“A central implication of the analysis here is that both Spain and Italy remain solvent,” Mr. Cline writes.
“The two large at-risk debtors have been and should continue to be treated as solvent and capable of carrying their debt rather than requiring some form and extent of debt forgiveness,” the study argues.
Interest on sovereign debt of more than 7 per cent is often cited by analysts as the threshold at which Spain and Italy get into trouble.
Instead, Mr. Cline suggests that both countries could sustain rates of 7 to 7.5 per cent for a long time – as long as they meet their baseline fiscal targets.
Indeed, Mr. Cline points out that “successful achievement of fiscal targets is central to the speed of improvement” in the debt condition of both countries.
Now, just convince bond traders they have nothing to worry about.