CEBR: forget Berlusconi, battered Italy can't avoid bailout

A leading think tank has said that Italy  will become the next victim of the eurozone's debt crisis and bring to an end the single currency zone's 12-year era.

Despite claims on Wednesday evening from Italian prime minister Silvio Berlusconi that the his country's economy could withstand continued pressure, the Centre for Economics and Business Research (CEBR) disagreed, warning Italy was likely to be the next nation forced to seek a bailout.

With Italy's economy being twice the size of the Greek, Portuguese and Irish economies, another large-scale rescue would be unaffordable for the eurozone.

The bleak analysis from the CEBR will do little to calm market jitters about the crisis, which in recent weeks has triggered severe price falls in risk assets and a rush towards traditional safe havens such as gold, Treasuries the Swiss franc and gilts.

Gold continued its climb overnight, with gold spot rising 0.28% to $1,666.3 as markets across Europe closed in red on the back of mounting fears about Italy and Spain. 

Wall Street's Dow Jones was one of the few indices to post a gain.  Led by the technology sector, the Dow Jones ended the day's trade up 30 basis points at 11,896 amid hopes the Federal Reserve would roll out a third programme of quantitative easing to prevent the country slipping into recession.

Spreads continue to feel the strain

Wednesday evening's speech by Berlusconi offered little calm, as although borrowing costs for Italy and Spain have started to fall, they continue to rival their euro-era highs and within touching distance of the levels which triggered bailouts in Ireland, Greece and Portugal.

Benchmark 10-year Italian spreads have today fallen from 6.21% to 6.02%, and from 6.34% to 6.29% for Spain.

In his first public speech on the crisis, Berlusconi said the country was suffering a 'crisis of trust' and had to ignore these examples of nervousness in markets. He said: 'The political system is solid.  The fundamentals of the economy are solid, or banks are liquid , solvent and have passed the stress tests.  The markets are taking into account our solidness and points of stress.'

However the CEBR believes that eurozone policymaker's failure to sort out their economic problems before breaking for summer has left Spain, and Italy in particular, in a more vulnerable position.