Michael Spence provides a qualified answer to that question. He takes a look at Italy's debt situation and compares it favorably to that of other countries that have less difficulty funding their debt. Unlike Greece, which does not have the resources to deal with its problems, Italy has the potential to fix its problems. Time is of the essence however. Italy must turn over a large amount of its debt in the next 6 months. It will take time and political will for Italy to achieve the structural reforms that are needed to prevent the selling of Italian debt which raises the interest rate to unaffordable levels, as well as affecting credit availability as banks are forced to write down the value of the debt that they hold.
Since Italy does not have time to complete necessary structural reforms, a circuit breaker is required. Italy needs access to a lender of last resort. Unfortunately, the German government fears that making loans to Italy represents a moral hazard. If Italy is bailed out by the ECB the incentive to make the needed structural reforms may be attenuated.
The risk to the eurozone of an Italian default is the abyss that most be viewed in the context of the moral hazard problem. The abyss seems more dangerous than providing the needed circuit breaker.
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