EU President Warns Debt Crisis Is Spreading

The President of the European Commission has warned that the eurozone debt crisis is spreading.

In a letter to European Union leaders, Jose Manuel Barrosso called for a re-assessment of all elements of the eurozone's current and future bailout funds.

He is urging them that the eurozone needs to convince markets that it can respond to the debt crisis.

Mr Barroso said: "Whatever the factors behind the lack of success, it is clear that we are no longer managing a crisis just in the euro area periphery."

The announcement comes just hours after think tank Centre for Economics and Business Research (CEBR) said it believed Italy will default and fall victim to the eurozone debt crisis due to its weak economy.

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.

Speaking on Sky News, CEBR chief executive Doug McWilliams said: "Berlusconi hasn't solved the problem of the Italian economy, which has now become uncompetitive with the Euro."

Berlusconi's 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 but later fell back again on the back of disappointing results from Lloyds Banking Group.

The sense of eurozone crisis is far from 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.

Mr McWilliams said: "The only alternative is for the Germans to bail them out.

"But this generation of Germans has already paid for East Germany; to go up to them and say 'you also have to pay for Italy as well', is a pretty tough ask."

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 before falling back a little today.

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