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Italy Likely to Default Says CEBR

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 Spain’s debt is much lower than Italy’s. Even in a “worst-case scenario” Spain’s debt ratio should not exceed 75 percent of GDP over the next decade – 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 country’s bonds, the country’s debt ratio will exceed 150 percent of GDP by 2017.

At last Thursday’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.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Scott Boyd

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