British consulting firm, the Centre for Economics and Business Research, has released a report finding it unlikely that Italy will be able to avoid defaulting on its debt. In the same report however, the CEBR noted that Spain may yet find a way to avert a similar fate.
According to the CEBR report, the difference between the two situations is the fact that SpainÃ¢â‚¬â„¢s debt is much lower than ItalyÃ¢â‚¬â„¢s. Even in a Ã¢â‚¬Å“worst-case scenarioÃ¢â‚¬Â SpainÃ¢â‚¬â„¢s debt ratio should not exceed 75 percent of GDP over the next decade Ã¢â‚¬â€œ Italy on the other hand is already near 130 percent of GDP.
Worse still, the CEBR projects that if yields remain above the 6 percent now required to attract investors to the countryÃ¢â‚¬â„¢s bonds, the countryÃ¢â‚¬â„¢s debt ratio will exceed 150 percent of GDP by 2017.
At last ThursdayÃ¢â‚¬â„¢s bond auction, Italy successfully sold 2.7 billion euros (US$3.8 billion) worth of 10-year bonds. The rate to entice investors, however, rose to an eleven year high of 5.77 percent. This is a significant increase over the June 28th auction where 10-year securities sold at 4.94 percent. This also represents a risk premium of 252 basis points when compared to the benchmark German bunds currently priced at 3.25 percent.
The CEBR gives Italy an outside chance of avoiding a default but only if the economy manages a significant growth increase. The chances of this appear slim indeed when considering the latest figures. For the first three months of 2011, the economy expanded by a miniscule 0.1 percent and indications are the second quarter will return a similar result once the tally is complete.
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