EU sees Italy debt ballooning to nearly 160% this year amid coronavirus crisis

* EU forecasts bigger rise in Italy’s debt than Rome estimates

* Yields of Italy’s sovereign bonds already under stress

* Italy to have largest deficit in euro zone this year

BRUSSELS, May 6 (Reuters) - Italy’s public debt is set to rise to nearly 160% of gross domestic product this year as the economy shrinks due to the coronavirus crisis, the EU executive estimated on Wednesday, adding even more gloom to Rome’s already dark predictions.

Brussels’ sombre economic forecasts, the first since the start of the pandemic, may put further strain on Italian government bonds, which are already being tested by markets despite the European Central Bank’s massive purchases.

A ruling on Tuesday by the German constitutional court questioning ECB stimulus programmes caused a sharp selloff in Italian debt, pushing yields nearly 20 basis points to a week-and-a-half high of 1.947%.

The executive European Commission said Italy’s debt was set to spike to 158.9% of GDP this year before marginally dropping in 2021, a massive jump from the already huge ratio of 134.8% recorded in 2019, and the highest level since World War II.

Brussels’ estimates are gloomier than Italy’s own forecasts. Rome had predicted at the end of April that the country’s debt would rise to 155.7% this year.

Within the 27-nation European Union, Italy’s debt ratio would remain second only to that of Greece, which is predicted to surge to nearly 200% of GDP this year. In 2021, the Commission forecast the Italian debt would drop to 153.6% of GDP.

As Italy begins to ease one of Europe’s longest and strictest coronavirus lockdowns, the costs of the emergency restrictions become clearer.

The Commission estimated the country’s deficit to jump to 11.1% this year, well beyond the EU’s 3% ceiling that has, however, been suspended during the pandemic to allow necessary extra spending.

All 19 countries of the euro zone will greatly breach the 3% limit this year, the Commission also said, but Italy’s fiscal gap was predicted to be the largest in the bloc, which on average will record an 8.5% deficit.

Italy’s record gap is due to higher spending, fewer revenues and a massive hit to its output this year, as factories and shops were shut for months while consumers stayed at home.

Brussels predicts a 9.5% fall in Italy’s GDP this year, and a 6.5% rebound in 2021. Within the bloc, only Greece is expected to see a worse recession than Italy’s with a predicted output slump of 9.7%. Spain’s GDP is forecast to drop by 9.4%. The average fall in the euro zone is seen at 7.7%.

The Commission’s prediction is based on the forecast that Italy will begin growing again already in the second half of this year, offsetting a GDP drop of about 18% in the first six months of the year. (Reporting by Francesco Guarascio @fraguarascio, Editing by Gabriela Baczynska)