QNB: Italy Regains Market Confidence on Improved Fiscal Position and Political Stability

QNB said Italy is quietly regaining its standing after moving from being a source of concern in European markets to one of renewed credibility, supported by stronger economic fundamentals, fiscal consolidation, political stability, and more resilient private-sector balance sheets and external financial position.

In its weekly report, QNB expected Italian bond yield spreads to remain below the levels reached during previous periods of stress, although the global repricing of sovereign risk has caused spreads to widen in recent weeks. It noted that the decisive test still lies ahead for the country.

With the deficit expected to rise again to 3.4% of gross domestic product in 2027 to fund defence and energy needs, and a general election scheduled for later that year approaching, maintaining fiscal discipline will be essential to cement Italy’s hard-won credibility.

The report said Italy was regarded as one of the weaker countries in the Euro area for much of the past 15 years. High public debt, chronically low growth, a fragile banking sector and frequent changes of government made Italian government bonds a recurring source of market stress, from the sovereign debt crisis of 2011–2012 to the budget dispute with Brussels in 2018.

In September 2022, amid the energy crisis and a change of government, the spread between Italian and German 10-year government bond yields stood at 251 basis points. That level reflected persistent investor doubts over debt sustainability, but Italy has since achieved a quiet and remarkable turnaround.

By January 2026, the spread had narrowed to 59 basis points, its lowest level since 2008. More recently, Italy’s 10-year government bond yield fell below its French equivalent, an inversion first recorded in late 2025 that has become more pronounced in recent weeks.

QNB said credit rating agencies followed the markets. Fitch upgraded Italy to BBB+ in September 2025, the country’s first upgrade since 2021, while Moody’s raised Italy to Baa2 in November, its first upgrade in 23 years, citing political stability, prudent fiscal policy and a strengthening banking sector.

The report said Italy’s improved assessment rests on solid fundamentals rather than merely reflecting favourable global liquidity conditions. It added that the recent widening of the yield spread does not represent a reversal of the improvement in the country’s economic fundamentals.

The report identified three main factors behind Italy’s comeback: credible fiscal consolidation, an unusual period of political stability, and significant improvement in the financial positions of the private and external sectors.

Regarding the first factor, QNB said Italy had delivered credible fiscal consolidation by narrowing its budget deficit faster than many expected. The general government deficit fell from 7.1% of GDP in 2023 to 3.4% in 2024 and 3.1% in 2025, while the government expects it to reach 2.9% of GDP in 2026, within the European Union’s 3% ceiling for the first time since 2019.

The report said achieving a primary surplus is critical for a highly indebted country because it allows the debt ratio to stabilise even when interest costs rise. With public debt expected to peak at around 138% of GDP in 2027, this consistency has been a key factor in restoring investor confidence.

Regarding the second factor, the report said Italy is experiencing an unusual period of political stability that has helped reduce the risk premium that long weighed on its bonds. Since 1946, the country has had around 70 governments, with an average lifespan of just over one year, while frequent changes in governing coalitions and policy direction have often concerned investors.

The third factor is the improvement in Italy’s private-sector balance sheets and external financial position, which have become considerably more resilient than during previous periods of stress, reducing the country’s exposure to shifts in investor sentiment.

The report concluded that at the height of the sovereign debt crisis in 2011, Italy recorded a current-account deficit of nearly 3% of GDP and relied on foreign capital to finance it. Its current account recorded a surplus of 1.2% of GDP in 2025, confirming the reversal in the Italian economy’s position.

Source: QNA

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