With interest rates on its sovereign debt surging above 7 per cent, there is a rising risk that Italy may soon lose market access. Given that it is too big to fail but also too big to save, this could lead to a forced restructuring of its public debt of €1,900bn. That would partly address its “stock” problem of large and unsustainable debt but it would not resolve its “flow” problem, of a large current account deficit, lack of external competitiveness and a worsening plunge in gross domestic product and economic activity.

To resolve the latter, Italy may, like other periphery countries, need to exit the euro and go back to a national currency, thus triggering an effective break-up of the eurozone.

Until recently the argument was that Italy and Spain, unlike Greece, were illiquid but solvent given austerity and reforms. But once a country that is illiquid loses its market credibility, it takes time – usually a year or so – to restore credibility with appropriate policies. Unless there is a lender of last resort that can buy its sovereign debt in this period, the country may become insolvent. In this scenario, sceptical investors will push sovereign spreads to a level where it either loses access to markets or where the debt dynamic becomes unsustainable.