GRAPHIC-Italy, Spain key euro zone default dominoes -study                                                                                                                    
                                                                                                                   Reuters - 19/09/2011 15:34:49                                                                                                                
                                                                                                                                                                                                                                                                                      LONDON,  Sept 19 (Reuters) - 
A default by euro zone  strugglers Italy or Spain  would triple the likelihood of France  failing to meet repayments to  almost 50 percent, a study based  on credit default swap prices shows.
This conclusion, drawn from a Fathom Consulting model which  shows how  the chances of a country defaulting would change if  another sovereign  were unable to pay its debts, underlines how  high the stakes are in the  currency bloc's battle to halt the  spread of its debt crisis.
The probability of default by France, the euro zone's second  biggest  economy, would rise to 48 percent from 15 percent in the  event that  either Italy or Spain failed to honour repayment of  its debts, the  model shows.
French bank shares have suffered in recent weeks as markets  have  fretted about heavy exposure to Italy. Latest data from the  Bank of  International Settlements show French banks hold more  than 400 billion  euros of Italian private, public and bank debt.
In contrast, a Greek default only pushed the likelihood of  Italy, Spain or France defaulting higher by 3 percentage points.
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For the full graphic see: 
http://r.reuters.com/zec83s 
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"The probability of France or Italy defaulting given Greece  defaulting  is not that much higher than their unconditional  probabilities and that  is because their CDS spreads are not as  highly correlated with  Greece's," said Yiannis Koutelidakis, an  economist at Fathom Consulting   
"The markets don't believe so much that a default by Greece  would materially affect France or Italy."  
However, if the crisis took down Italy or Spain -- something  market  prices see carrying a 31 percent probability -- France  would begin to  look much more vulnerable.
"This makes sense because they are larger economies and they  are much  more closely integrated with the French economy than,  say Greece,"  Koutelidakis said.
The conditional probability of default model is based solely  on the  price of credit default swaps -- insurance contracts  taken out against a  failure to pay.