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The constant allusion to invariably vague doomsday scenarios that fills articles on the global economy is quite grating. What would really happen if Italy defau

The constant allusion to invariably vague doomsday scenarios that fills articles on the global economy is quite grating. What would really happen if Italy defaulted on its debt and started issuing its own currency? I suspect that the answer is no more and no less than, “Bond holders would lose money.” But so what? What is Germany going to do, invade Italy? Somewhat surprisingly, I can think of few things less politically feasible in 2019 than Germany invading another country. I think that the political impossibility of direct military conflict between developed nations is actually the cause of the hysteria that permeates the media whenever one threatens to default. All that the creditors can do is scream bloody murder at the top of their lungs and pray that the debtors don’t call their bluff.

joshuafkon 7y ago
Respectfully, I think the risks from Italy leaving the euro are extremely underrated. Italy defaulting on it's debt would be substantially worse than just "bond holders losing money." Italy has an extremely large amount of debt - if that debt dropped in value (like mortgage debt did in 2008)it would be catastrophic for every country in Europe. Who would bailout the entire country of Italy? That's the problem with sovereign debt, it's too large and there is no higher entity responsible for bailing it out.
- DATACOMMANDER 7y ago
  What specific, concrete events would occur, and why would the occurrence of these events constitute a catastrophe? Why would anyone need to “bail Italy out”? If they decide not to pay back their debt and start using their own currency, the problem is solved from their perspective. Sure, they’ll have to pay a much higher interest rate if they want to issue further bonds, but so what? Again, please avoid abstract terms when describing this supposed “catastrophe” that would follow a default.
  - joshuafkon 7y ago
    If Italy was to leave the Euro, and pay back their debts in a devalued currency: First it was be a massive deflationary shock to have that debt fall in value (very similar to how mortgage debt falling in value was a shock). Banks in France and Germany would see massive losses. Because of the leveraged nature of sovereign debt in the European banking system it would be extremely deflationary. Secondly, the debt of every other nation in Southern Europe would also be put into question. If Italy is going to devalue, how long before Spain, Portugal, Greece, etc. do as well? And the scale of all this debt is much larger than subprime mortgage debt was. Beyond that - imagine the monetary chaos if nations start to leave the euro and issue their own national currencies again? Will people be hoarding Euros? Selling them? If you look back at the reporting from back in 2010 when the European Sovereign debt crisis was at its peak - you'll see that just about every serious economist agreed that a sovereign debt crisis and the idea of defaults had the potential to be very bad.
    - DATACOMMANDER 7y ago
      The only concrete effect you’ve suggested is that French and German banks would lose money. Well, yeah, obviously. So what?
      - joshuafkon 7y ago
        When the assets that banks hold as capital reserves falls in value substantially it's quite bad for the entire economy. See this NYT article from 2011 when the market was worried about Italy: https://www.nytimes.com/2011/11/10/world/europe/euro-fears-spread-to-italy-in-a-widening-debt-crisis.html https://www.nytimes.com/2011/11/10/world/europe/euro-fears-s...
      - DATACOMMANDER 7y ago
        I can’t reply to your last reply for some reason, so I’m replying here. I’ll read the article you linked to, but I don’t expect anything other than more econobabble and fear-mongering. If a country’s entire economic system is based on a stupid assumption—in this case, that a sovereign nation will never default on its debt—then it ought to collapse. Still, I don’t believe that collapse would actually occur. I think that a lot of people would lose a significant amount of money and be quite upset. And then, the next day, the sun would rise, and people wouldn’t be starving in the streets, and life would generally go on.

joshuafkon 7y ago

Respectfully, I think the risks from Italy leaving the euro are extremely underrated. Italy defaulting on it's debt would be substantially worse than just "bond holders losing money." Italy has an extremely large amount of debt - if that debt dropped in value (like mortgage debt did in 2008)it would be catastrophic for every country in Europe. Who would bailout the entire country of Italy? That's the problem with sovereign debt, it's too large and there is no higher entity responsible for bailing it out.

DATACOMMANDER 7y ago
What specific, concrete events would occur, and why would the occurrence of these events constitute a catastrophe? Why would anyone need to “bail Italy out”? If they decide not to pay back their debt and start using their own currency, the problem is solved from their perspective. Sure, they’ll have to pay a much higher interest rate if they want to issue further bonds, but so what? Again, please avoid abstract terms when describing this supposed “catastrophe” that would follow a default.
- joshuafkon 7y ago
  If Italy was to leave the Euro, and pay back their debts in a devalued currency: First it was be a massive deflationary shock to have that debt fall in value (very similar to how mortgage debt falling in value was a shock). Banks in France and Germany would see massive losses. Because of the leveraged nature of sovereign debt in the European banking system it would be extremely deflationary. Secondly, the debt of every other nation in Southern Europe would also be put into question. If Italy is going to devalue, how long before Spain, Portugal, Greece, etc. do as well? And the scale of all this debt is much larger than subprime mortgage debt was. Beyond that - imagine the monetary chaos if nations start to leave the euro and issue their own national currencies again? Will people be hoarding Euros? Selling them? If you look back at the reporting from back in 2010 when the European Sovereign debt crisis was at its peak - you'll see that just about every serious economist agreed that a sovereign debt crisis and the idea of defaults had the potential to be very bad.
  - DATACOMMANDER 7y ago
    The only concrete effect you’ve suggested is that French and German banks would lose money. Well, yeah, obviously. So what?
    - joshuafkon 7y ago
      When the assets that banks hold as capital reserves falls in value substantially it's quite bad for the entire economy. See this NYT article from 2011 when the market was worried about Italy: https://www.nytimes.com/2011/11/10/world/europe/euro-fears-spread-to-italy-in-a-widening-debt-crisis.html https://www.nytimes.com/2011/11/10/world/europe/euro-fears-s...
    - DATACOMMANDER 7y ago
      I can’t reply to your last reply for some reason, so I’m replying here. I’ll read the article you linked to, but I don’t expect anything other than more econobabble and fear-mongering. If a country’s entire economic system is based on a stupid assumption—in this case, that a sovereign nation will never default on its debt—then it ought to collapse. Still, I don’t believe that collapse would actually occur. I think that a lot of people would lose a significant amount of money and be quite upset. And then, the next day, the sun would rise, and people wouldn’t be starving in the streets, and life would generally go on.