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Spain bailout hangs in the balance

Source: Reuters - Thu 8th Dec 2011

Italy and Spain will probably not need to seek funding from the euro zone's bailout facility in the next six months, according to a very slim majority of economists polled by Reuters.

The survey of around 60 economists, conducted just before a summit of European Union leaders aimed at announcing the big measures needed to quell the sovereign debt crisis, also said Standard & Poor's was justified in warning about the outlook for the entire euro zone.

27 out of 56 analysts said they expected Italy will need support from the European Financial Stability Facility and the IMF over the next 6 months, and 26 out of 56 also said Spain would.

Echoing a poll of leading academics and former policymakers last month, several analysts in the latest survey called for the European Central Bank to make a large-scale intervention in bond markets to stop the debt crisis worsening.

While borrowing costs for the Italian and Spanish governments have receded slightly over the last few days while the leaders of Germany and France stated their commitment to solving the crisis, they still hover near unsustainable levels.

"Italy and Spain are more likely than not to require assistance, if the ECB does not step in forcefully enough," said Christian Schulz, senior economist at Berenberg Bank.

He added that while both countries are pursuing economic reforms, until the ECB intervenes in a major way there is a risk that market panic will return and force them to seek aid.

Italy and Spain both have new governments that are planning fresh spending cuts to convince markets they are living within their means. However, it is unclear how these big economies - the third and fourth largest in the euro zone - will grow enough to make inroads into their debt piles.

Indeed, Standard & Poor's, the U.S. credit rating agency, on Monday said the rising risk of recession was one of five major factors behind its decision to put 15 of the euro zone's 17 states under review for a ratings downgrade.

A firm majority of analysts - 39 out of 52 - said it was justified in doing so.

"In our view, the euro zone is headed for a serious recession caused by a credit crunch which appears to be unfolding," said Azad Zangana, economist at Schroders in London.

"The only way to stop such a recession, or even worse, the breakup of the euro zone, is for Germany to yield to the rest of the union and allow the ECB to defend Italian and Spanish government bond yields without limit."

Asked an open question on how the ECB will support the euro zone economy, the vast majority of economists thought it would keep interest rates low and keep buying government bonds - either through its Securities Market Programme or through unsterilized purchases with new money, known as quantitative easing.

The ECB cut interest rates by 25 basis points on Thursday to 1.0%, equaling the record low set in 2009 during the Great Recession.

The poll reaffirmed the view of a snap survey of economists on Wednesday that France is very likely to lose its coveted triple-A credit rating in the next 3 months.

51 out of 65 economists said this would be the case. Only five, however, thought Germany would lose its top-notch rating too.

Unlike last month's survey of leading academics and former policymakers, most analysts thought the euro zone would survive the crisis intact.

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