Italy has a lot of debt, but also lots of wealth. There is, however, no need to sell off the Pieta. More than half of Italian government bonds are held domestically. Apply a wealth tax and use it to pay off all of the domestically held bonds; in essence the government takes the wealth with one hand and mails it back with the other. The debt/gdp ratio is more than cut in half and the announcement to do so comes immediately. The Italian citizenry is not poorer, although they are required to recognize losses which already have been incurred. The Italian government also can do some fraction of this, and retire part of the domestically held debt, rather than all of it.
NB: I am not predicting this will happen! And while it would not cure Italy’s underlying growth problems, and could make some of those problems worse, it would buy them time.
What’s scarce in this situation is trust. Why should Italian taxpayers think they will get the money back? And the intra-Italian redistributions of wealth — from homeowners to bondholders most likely — won’t be popular.
A riskier version of the same idea — not recommended but an instructive point of comparison — is to simply default on all domestic debt and be credible on foreign-held debt to the hilt, maybe sending the foreign debt holders Perugia chocolates in the mail.
The Germans of course understand this logic, which is one reason why they are not going to set up a Eurobond or sign off on ten percent inflation. Rightly or not, they actually have the gall to expect Italy to pay for the money it has borrowed. (Like so many bloggers, they tend to frame the issue very much in moral terms, though from a Germanic point of view, instead of fully blaming the ECB.) Italy can indeed do it.
Will? I don’t know. I’m not counting on it.