Public Confidence and Debt Management: A Model and A Case Study of Italy
High debt countries may face the risk of self-fulfilling debt crises. If
the public expects that in the future the government will be unable to roll
over the maturing debt, they may refuse to buy debt today and choose to hold
foreign assets. This lack of confidence may then be self-fulfilling. This
paper argues that under certain conditions, the occurrence of a confidence
crisia is more likely if the average maturity of the debt is short. On the
contrary, a long and evenly distributed maturity structure may reduce such a
risk. We consider the recent Italian experience from this perspective. In
particular we ask whether recent develnpmencs in che market for government debt
ahoy signa of unstable public confidence, and of a risk premium.
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