The EU and the IMF currently have enough funds to bailout another couple of countries that are steeped in debt. Currently, Italy, Spain and Portugal are fighting to survive while investors wonder which one will throw in the towel first.

The trio will face a challenging schedule of bond redemptions in 2011 that will test investor resolve to continue financing these countries, Jay Bryson, an economist at Wells Fargo Capital, said in a note.

Even if debt is rolled over without incident in the early part of the year, we believe government bond yields in these indebted countries will remain elevated for some time due to lingering concerns about debt sustainability, Bryson added.

Italy seems to be faring the best of the three. The country does have the highest amount of redemptions but the government deficit is much smaller compared to the other two.

Unlike Spain, Italy never had much of a housing bubble, so massive bank recapitalization in Italy is not likely, Bryson said.

The Italian economy grew 0.3 percent in the third quarter, which was lower than the 0.5 percent in the second but higher than market expectations.

Economic and Monetary Affairs Commissioner Olli Rehn praised Italy's prudent financial stance and said the country was 'back to its pre-crisis growth rates soon'.

But growth rate apart, Italy still faces the challenge to reduce its debt level and also enhance growth potential.

The country's large stock of government debt and its formidable redemption schedule make Italy vulnerable to the whims of jittery investors, Bryson said, adding that the yields on Italian government debt could shoot higher as a result, eroding debt sustainability.

Dangers also remain as the domestic demand in Italy remains sluggish, and has been even before the downturn, while an acceleration in consumer and business fixed investment spending does not seem likely anytime soon, Bryson said.

This could raise concerns about debt sustainability in Italy.

Italy has also room to cut its budget deficit further, if needed. Italy's Senate has approved an austerity package amounting to cuts of about 25 billion euros. There have been severe protests against the cuts, particularly from the Italian universities, who are one of the biggest victims of the cuts.

However, the past ability of the Italian populace to accept significant austerity suggests that the Italian government could possibly take the steps necessary to avoid sovereign default, Bryson stated.

In the meanwhile, the Italian Prime Minister Silvio Berlusconi has enough opponents who are protesting the austerity measures. Even as the nation was reeling under a heavy debt, Gianfranco Fini, a former Berlusconi ally and party co-founder, jumped ship to create a new administration and a new agenda for reform. The opposition is waiting to jump on a chance when the current government flounders and Italy's economy heads further down.

SPAIN AND PORTUGAL

Bets are on about which country will fold first and ask for aid from the EU/IMF fund. The fund, which was about 750 billion euros, has been depleted with bailouts awarded to Greece and Ireland in 2010.

The fund would have enough to support Portugal and most of Spain's financing needs, Bryson said in the note.

Portugal is the front runner for economic assistance in Bryson's book.

Portugal's economy has been sluggish even before the recession. The GDP grew at an average annual rate of only 3.4 percent in the past decade, one the slowest rates in the 16 countries in the Eurozone, according to the Wells Fargo note.

The OECD projects growth rate of 1 percent in 2011 and 3 percent in 2012.

Although this fiscal consolidation will improve the debt sustainability of the Portuguese government, everything else equal, the associated revenue increases and spending cuts will exert powerful headwinds on economic growth, Bryson said.

Both Spain and Portugal also face further problems with slower exports, where most of them are meant for other nations in the eurozone, which is currently struggling to grow.

Bryson believes that real exchange rate appreciation will make it difficult for these countries to export its way to prosperity. And a weaker-than-forecast GDP growth would necessitate another round of consolidation to hit budget targets in Portugal, he added.

A vicious circle of budget cutting and weak economic growth could take hold, which could lead to political pressures on the minority Socialist government to jettison fiscal austerity, he added.

However, Spain's banks could require recapitalization, given that housing bubble burst, like in Ireland.

Though the Spanish government is taking steps to reduce its budget deficit, if yields on Spanish government bonds stay at current levels, much less rise further, and nominal GDP growth remains lackluster, then the government would need to reduce its deficit even more to bring about debt sustainability, Bryson said.