What Happens If Italy Slides Toward Default?

Italy’s debt has long been the Achilles’ heel of the euro area. In recent years, inflation has been too low, prompting extensive asset purchases by the European Central Bank. That helped keep borrowing costs down for the government in Rome. Now the monetary authority’s fight against inflation has put the nation’s debt onto an unsustainable trajectory. It could yet get worse, and the ECB will struggle to resolve the problem alone. Italy’s new government, with the right-wing Giorgia Meloni at the helm, is set for a baptism by fire.

With yields leaping, Italy’s debt-to-gross domestic product ratio is on track to rise to almost 190% of GDP by 2040, from 150% at present. Back in January, that figure was set to decline slightly in that time frame.