Italy may be “first and foremost” among European nations with unsustainable debt, said Simon Johnson, a former International Monetary Fund chief economist.
Resolving Europe’s financial crisis will “take a long time” and involves “a major shift in how people think about debt and how they think about risk around the world,” Johnson said today in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.
“These countries will try and do many things to avoid that kind of restructuring and this is going to be a long and painful process,” said Johnson, a professor at the Massachusetts Institute of Technology’s Sloan School of Management and a Bloomberg View contributor. “These countries haven’t had major debt defaults since the 1930s.”
Bringing down funding costs is critical for Italy, which has a debt of almost 2 trillion euros ($2.5 trillion), the euro-region’s second biggest in nominal terms after Germany. The Treasury still has to finance 165 billion euros of maturing bonds and bills this year, more than three times the level faced by Spain.
European Central Bank President Mario Draghi’s bond-buying proposal involves unlimited purchases of government debt that will be sterilized to assuage concerns about printing money, two central bank officials briefed on the plan said.
While Draghi’s policies “may temporarily help stabilize” the crisis, “European economies have to turn themselves around, they have to get back on a growth track,” Johnson said. “That’s not what we’re seeing right now.”
In the U.S., debate on how to avoid the so-called fiscal cliff of automatic spending cuts and tax increases probably won’t occur until after the Nov. 6 election, and lawmakers have an “unlimited” ability to delay “big decisions that remain to be made about taxes,” Johnson said.
Government debt has reached $16 trillion for the first time after rising $1 trillion since November, Treasury Department data show. Lawmakers must negotiate on raising the $16.4 trillion federal debt ceiling. The U.S. will reach the limit in the fourth quarter of this year and can take measures so that Congress doesn’t have to raise it until 2013.
“For sure we’re going to have that debate in November and December,” Johnson said. “There are huge decisions that are going to be made, like it or not, in the context of this fiscal cliff.”