Italy 'to default' but Spain may 'just' escape

Silvio Berlusconi On Wednesday Silvio Berlusconi told parliament that Italy's economy was "solid"

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Debt-laden Italy is likely to default, but Spain might just avoid it, according to the British think tank, the Centre for Economics and Business Research.

With the countries weighed down by debt, the think tank modelled "good" and "bad" economic scenarios for both.

It found that Italy will not avoid default unless it sees an unlikely big jump in economic growth.

However, it said, "there is a real chance that Spain may avoid default".

Even though Italy has managed to run tight budgets, and has vowed to eliminate its deficit by 2014, the economy needs a significant boost in growth.

But its economy grew by just 0.1% in the first quarter of 2011 and further growth is expected to remain sluggish.

On Wednesday, Italian Prime Minister Silvio Berlusconi addressed parliament, saying the economy was "strong" and the nation's banks "solvent".

But many economists believe that the eurozone's third largest economy risks being engulfed in the debt crisis.

In a report published on Thursday, the CEBR calculated that Italy's debt would rise from 128% of annual output to 150% by 2017 if bond yields stay above the current 6% and growth remains stagnant.

"Even if the cost of borrowing goes back down to 4%, the growth rate is so anaemic that we see the debt-GDP ratio remaining at 123% in 2018," said Doug McWilliams, the CEBR's chief executive.

The conditions in Spain are better because its debt is much lower. Even under the "bad" scenario, Madrid's debt ratio would climb to no higher than 75% 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," Mr McWilliams said.

"Realistically, Italy is bound to default, but Spain may just get away without having to do so," he said.

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