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Italy to default, Spain may scrape by

Italy will likely default but Spain could scrape through, the Centre for Economics and Business Research said on Thursday as the eurozone debt crisis threatened to engulf the two eurozone countries.

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The CEBR said it had modelled good and bad scenarios for the two countries and Italy could not support its debt even if rates fall back unless the eurozone’s third-largest economy sharply increases growth.

“Realistically, Italy is bound to default, but Spain may just get away without having to do so,” said the London-based consultancy.

Even though Italy has managed to run tight budgets — and plans to eliminate its deficit by 2014 — with its massive debt it won’t be able to escape if it can’t boost its growth rate, it said.

It calculated Italy’s debt would rise from 128 per cent of annual output to 150 per cent by 2017 if bond yields stay above the current 6 per cent and growth remains stagnant.

The country’s economy grew by just 0.1 per cent in the first quarter of the year.

“Even if the cost of borrowing goes back down to 4 per cent, their growth rate is so anaemic that we see the debt GDP ratio remaining at 123% in 2018,” said the CEBR.

Italian Prime Minister Silvio Berlusconi called for a growth action plan on Wednesday in an address to MPs.

The CEBR said the situation is better for Spain as its debt is much lower, and calculates that even under its bad scenario Madrid’s debt ratio would climb to no higher than 75 per cent of national output.

“Fingers crossed but there is a real chance that Spain may avoid default and debt restructuring unless it gets dragged down by contagion,” said the consultancy.

It calculated that the maximum sustainable bond yields for weaker southern European countries whose competitiveness has been hit by staying in the euro is really 4-5 per cent, rather than the 6-7 per cent advanced by many analysts and the markets.

The rate of return on Italian and Spanish 10-year bonds has surged above six per cent in recent days.

However it warned that if one eurozone country defaults the markets would ratchet up pressure on others, dragging them down and making it increasingly attractive to exit the eurozone.

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