Italy more likely to default than Spain
The Centre for Economics and Business Research says that Spain has less of a debt burden than Italy and that it could export its way out of trouble. Growth in Italy, however, is "anaemic" and it has a much bigger debt burden which is likely to remain high until at least 2018.
Another bailout for Greece and still European regulators are no closer to resolving the European sovereign debt crisis or the contagion effect it is having on other markets within the eurozone.
While the Greek issue still bubbles beneath the surface, tempered by the recent bailout, investors and ratings agencies are now asking questions about Italy and Spain, with markets responding by increasing the cost of financing their debts.What an embarrassing predicament for the EU and for the ECB, particularly given that come October when the current ECB president, Jean-Claude Trichet, steps down, his position will be assumed by Italian central bank governor, Mario Draghi. Will Draghi be able to put a lid on the European sovereign debt crisis and steer the ECB away from bailing out every eurozone country that runs into trouble? As an Italian, will he be able to put aside nationalistic concerns when it comes to deciding who gets what in terms of bailouts or rescue packages?
I mention Draghi because the latest communique from the Centre for Economics and Business Research states that Italy is more likely to default on its debts than Spain. Douglas McWilliams, CEO of Cebr, observes that unlike his Spanish counterpart, Italian prime minister Silvio Berlusconi has not cancelled his summer holiday to resolve the impending debt crisis in his country.
McWlliams says the dynamics between the Spanish and Italian situation are different and it has modeled both good and bad outcomes for both markets to see how they compare. Spain comes off less worse than Italy, and according to Cepr's research, even if the worst outcome arises, its debt-to-GDP ration will be no higher than 75% of GDP. This is contingent, however, on their being no additional financing of the banking sector.
"The key to Spain is that their exports remain fairly successful despite the strength of the euro..." says Cepr. "Fingers crossed but there is a real chance that Spain may avoid default and debt restructuring unless it gets dragged down contagion."
Italy, on the other hand, is a different story. It has a much worse debt burden at 125%, and according to Cepr, if the markets continue to force on them borrowing costs at around 6% and growth stays close to zero, the debt to GDP ratio will rise to more than 150% by 2017. And with its economy growing at such a slow rate, Cepr says the debt to GDP ratio could remain at 123% in 2018. It says Greece and Portugal are potentially in a similar position as they cannot export their way out of trouble unlike countries like Ireland, and to a lesser extent Spain, which has a much smaller debt burden.
All of this is contingent on how markets react to an actual default. While it seems we have been on the precipice of an actual default for some time, when it actually happens, Cepr warns that the contagion effect could take hold and markets are likely to put pressure on the weakest links by pushing up bond yields.
Date Posted:3rd August 2011