'Italy Bound To Default,' Think Tank Says

Italy will default and fall victim to the eurozone debt crisis due to its weak economy, according to a think tank.

Italy and Spain, the eurozone's third and fourth largest economies, are both facing pressure from markets to sort their economies out.

But Italy should be the focus, according to the Centre for Economics and Business Research (CEBR) , as it is likely to be the next victim of the debt crisis.

Italy's starting debt position is at 128%, much worse than Spain's 75%.

Italian Prime Minister Silvio Berlusconi's £38bn austerity package is not tight enough, and will not be able to repair its weak economy, says the think tank.

Mr Berlusconi sought to calm fears the country is headed for a financial abyss in a speech to Parliament on Wednesday, in a bid to halt stocks crashing further.

His remarks, which followed trading yesterday, helped the Italian market recover 2% of its value on opening this morning.

Wider european stock markets also rebounded after days of sustained losses - largely due to a lack of further damaging data.

The FTSE 100 gained 1% in its first few minutes' trading while Germany's Dax and the French CAC 40 also saw similar additions.

But that does not mean the sense of crisis is over.

The CEBR points out that, with Italy's economy twice as big as Greece, Portugal and the Irish Republic combined, a bailout would probably be unaffordable for the eurozone.

It would, in fact, mean the end of the eurozone altogether, the CEBR said.

Spain, on the other hand, will most likely get away without defaulting as its exports remain fairly successful despite the strength of the euro, the think tank said.

Spanish Prime Minister Jose Luis Zapatero has in recent days sought to adopt a more proactive stance on tackling the crisis.

He has called for an early election to "create political and economic certainty", and delayed his summer holiday to deal with economic reforms.

Yields on Spanish and Italian 10-year bonds hit their highest levels since the launch of the euro on Tuesday, meaning that it would cost both countries' governments more to borrow money if they wanted to.

Their 10-year bond yields stood at 6.24% and 6.10%, respectively, on Wednesday.

The gap between them has narrowed as Italy has now overtaken Spain as the main focus of market concern about debt sustainability.