Originally published: VoxEU, 29 August 2018
Over the last few months, the risk premia on Italian government bonds have increased considerably. This column uses data on sovereign credit default swaps and governments bonds denominated in different currencies to disentangle fiscal risk from redenomination risk (i.e. the risk of Italy leaving the euro). Redenomination risk appears to be responsible for about half of the overall increase in the spread, suggesting that playing with the idea of exiting the euro can be costly even if public finances remain under control.
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