«Now they are no longer the periphery of Europe, the spread will fall further»

Italy and Spain are no longer the periphery of Europe. At least as far as the cost of debt on the market is concerned. It’s the one who says it Financial Times. According to the British newspaper, a mirror of the finances of the City of London, the government bonds of the respective countries will strengthen further in 2026 and the spread with the German Bunds will continue to fall (given the Italian rigor on public finances in the context of a stable government on the one hand and the strong Spanish growth on the other). While countries considered historically safe (not only Germany, but also France, Austria and Belgium) see debt, deficit and cost of bonds increase. In short, according to the newspaper, whoever was Cinderella becomes the master and vice versa. In a climate of general strong concern about the increase in debt in the Eurozone.

The excess yield on Italian 10-year debt over German government bonds narrowed to 70 basis points this month, the lowest level since late 2009. While Spanish GDP momentum (the best in all of Europe) helped narrow the 10-year yield differential with Germany to less than 50 basis points. This is the lowest level since before the Eurozone crisis in 2011, when high public debt increased borrowing costs in both countries and raised fears of a possible breakup of the monetary bloc.

THE COMPARISON

Fund managers, as the newspaper reports, have started to appreciate Italian and Spanish debt in the context of a general economic recovery in southern Europe, arguing that it no longer makes sense to classify such debtors as the riskiest “periphery” of the Eurozone. At the same time, a huge budget deficit and political turmoil in France – traditionally considered one of the safest economies in Europe – have pushed borrowing costs above those in Spain.

Credit agencies, including S&P, predict that Paris’ debt-to-GDP ratio will reach 120% in the next few years (close to Italy’s, which is forecast by the International Monetary Fund at 137% in 2030). Even Germany, the de facto safe haven of the euro area, was subject to a reassessment by the markets after launching a trillion-euro spending plan on defense and Infrastructure. According to analysts, therefore, the spreads of Rome and Madrid government bonds compared to German Bunds will narrow further next year.

Bringing that of Italy to 50-60 basis points and that of Spain to 30-40 basis points. A level so low that, for example, Madrid was able to afford to refuse the loans provided by Brussels for its Pnrr, given that the Iberian state is able to finance itself on the markets at an equivalent or even lower cost.

THE MOMENTUM

Spain, the FT experts point out, is destined to become the fastest growing advanced economy in the world for the second consecutive year. Thanks to a virtuous combination of immigration management, tourism, low energy costs and European funds, in fact, the GDP of the state led by the government of Pedro Sanchez will rise by 2.9% this year, while the deficit will fall to 2.5%. The Italian economy, underlined by Financial Timesis much slower, with growth expected to be below 1% of GDP until at least 2027. Rome, in the opinion of investors, is however reaping the fruits of the efforts of the last ten years to limit tax evasion, which is increasing revenue collection.

Investors who also say they “appreciate the Italian government’s commitment to reducing the deficit”, which will fall in 2025, faster than expected, below the 3% threshold imposed by the EU, allowing us to exit the infringement procedure. This «despite the pressure from the workers, at taken with the contraction of the cost of living, to increase wages”. Pressure to which the executive, according to experts, still needs a structural response, given the sharp reduction in real wages (-8.8%) in the last four years.

In absolute terms, borrowing costs in Italy and Spain remain elevated compared to the period of very low or negative interest rates seen during the Covid pandemic. However, the fact that these bonds are traded at prices close to France, Germany and so-called “frugal” countries puts them into a different regime, opening them up to broader global demand. In short, even non-European central banks, usually very cautious, could start to also consider Italy or Spain when investing their foreign reserves.