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Italian bond yields have fallen in recent days as investors bet on euro zone policy makers acting as a lender of last resort. But Richard Farr, Managing Director at Boenning & Scattergood, tells BNN that even with the lower bond yields, Italy will be unable to pay down its debts.
"There's a strange thing that happens when debt-to-GDP exceeds 100 percent. Whatever your interest costs are, that's what you need to grow your economy by to match your interest costs," he tells BNN. "In the case of Italy we're not talking about 100 percent debt-to-GDP, we're talking about 120 percent."
Farr says that with Italy's high debt to GDP ratio, the country has to pay interest costs equivalent to 6 percent of GDP, which means its economy has to grow at a similar pace.
"Right now Italy is heading into a recession -- we don't know how deep yet -- they're already going to have to dig themselves out of a deep hole," he says. Farr says Italy would need to interest as low as 2 or 3 percent to stay solvent, which is something "they can't get in the private market at this point."