FRANKFURT (MNI) – Spanish and Italian debt ratios would be
sustainable and begin to fall at some point if the governments in Madrid
and Rome achieve their respective fiscal goals in the medium term,
according to an analysis by the European Central Bank.

The ECB exercise, the results of which were published Thursday in
the central bank’s latest monthly bulletin, examined three adverse
growth scenarios and compared them to baseline scenarios that had been
taken from the latest Spanish and Italian macroeconomic and fiscal
projections for the period through 2015.

The first scenario assumes GDP growth one percentage point lower
than in the baseline for the period between 2013 and 2015. The second
scenario looks at a case in which the Spanish and Italian governments
deliver on only half of their respective adjustment programs. The third
scenario examines a hypothetical situation in which market interest
rates on government debt are 200 basis points higher than the baseline.

For both countries, failure to deliver fully on promised reforms is
the scenario in which the debt-to-GDP ratio would reach its highest
level. For Italy specifically, the analysis showed that the debt ratio
would only stabilize at current levels, while not providing an adequate
buffer against adverse macroeconomic shocks.

“First, in this exercise, a key driver of the results is that, in
the baseline and in all scenarios except the consolidation shortfall
scenario, it is assumed that the governments concerned will achieve
structurally balanced budgets in the medium term, as prescribed by the
Stability and Growth Pact,” the ECB said.

“This underlines the importance of governments living up to their
commitments under the EU fiscal governance framework and delivering the
required progress towards structural balance (and corresponding primary
surpluses),” the bulletin continued. “Failing to achieve this target
will immediately give rise to substantial risks for debt
sustainability.”

The ECB report stressed that the above scenarios should not be
interpreted as forecasts.

— Frankfurt bureau: +49 69 720 142; email: frankfurt@mni-news.com —

[TOPICS: M$$CR$,M$X$$$,M$I$$$,M$S$$$,M$$EC$]