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Italy stuck in recession, next in line for Spain-style bailout?

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Now that Spain has asked for its bailout — up to 100 billion euros, or $126 billion — speculation is now shifting to Italy as the next euro zone nation that could ask for a handout.

Italy is slipping further into a recession — its fourth since 2001 — official numbers from Istat showed Monday. Gross domestic product slumped 0.8% in the first months of the year compared with the previous quarter, making for the worst tumble in three years.

By contrast, Spain’s economy tightened 0.4%, according to its central bank.

Exports and consumer spending were also down in Italy, Europe’s third-largest economy. Households have begun to lash out against austerity measures implemented by Prime Minister Mario Monti.

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The Italian economy is set to contract an additional 1.5% this year, according to the Bank of Italy. The Organization for Economic Cooperation and Development has predicted a 1.7% contraction.

Yields for benchmark 10-year Italian government bonds are up 26 points Monday to 6.03%.

Late Friday, the Moody’s rating agency said that Spain’s banking problem “is not likely to be a major source of contagion to other euro area countries, except for Italy.”

Its rationale? Italy and its banks have come to rely heavily on funding from the European Central Bank.

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But there is still much working in Italy’s favor, especially when compared with Spain. Italian banks didn’t suffer from the same housing market cave-in that crippled its Spanish counterparts.

On Monday, not long after slashing credit ratings on five Spanish banks, ratings agency Fitch downgraded Spain’s two largest banks — Banco Santander and Banco Bilbao Vizcaya Argentaria — to BBB-plus.

Italy’s unemployment rate is half that of Spain’s. Its borrowing costs are lower.

“In the past months, Italy has done, from a financial point of view, everything that needed doing to save itself,” said Italian Industry Minister Corrado Passera to a group of reporters Monday, according to the Wall Street Journal.

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