Italy's borrowed calm

The number has the force of a symbol. In January 2026, the yield gap between Italy’s ten-year bond and its German counterpart closed at 64.6 basis points, its lowest level since 2008. Three years earlier, in September 2022, that same gap brushed 251 points, and markets were speculating on Rome’s ability to fund itself without the shadow of the ECB. In between, Italy collected seven rating upgrades in a single year, moved back below France, and saw its deficit fall under the 3% line. The story of Italian fiscal redemption writes itself. It is not false. It is only half true, and that missing half changes everything.

Let us start by giving Rome its due, because the improvement is real and it would be dishonest to deny it. Moody’s raised Italy’s sovereign rating from Baa3 to Baa2 on 21 November 2025, its first upgrade in twenty-three years, praising political stability and execution of the recovery plan. S&P had opened the ball in April, and seven upgrades in all punctuated the year. The public deficit fell to 2.98% of GDP in 2025, below the European threshold, paving the way for an early exit from the excessive deficit procedure. Italy even ran a primary surplus in 2024, the only G7 country to do so. And foreign capital came back: it held €1,038 billion of Italian debt in August 2025, some 33.7% of the total, up €121.6 billion over the year. Nothing cosmetic in that. The Meloni government, now one of the longest-lasting of the Republic, has delivered the rarest commodity in Italian politics: fiscal steadiness.

But look at what moved

The problem is not in these facts, it is in how they are read. A spread is a gap, therefore a subtraction, and a subtraction can tighten because the first term falls or because the second rises. In 2025, almost all the movement came from the second term. The yield on the ten-year Italian BTP went from 3.52% at end-2024 to 3.46% in November 2025, a mere six basis points lower. Over the same stretch, the German Bund’s yield climbed 34 points, to 2.7%. The 40-point tightening of Italy’s spread was therefore not a BTP rally: it was, more than 80% of it, the Bund rising.

This is not a coincidence, it is a regime. We described elsewhere the end of Bund scarcity, that once-rationed asset, throttled by the debt brake and ECB purchases, now issued in floods to finance defence and infrastructure. When the German anchor stops being unfindable, it yields more, and everything measured against it tightens mechanically, without the periphery having done a thing. A good part of the European spread “normalisation” is in reality a normalisation of Germany. Italy has the merit of not having widened while the Bund rose, which in past cycles was far from guaranteed; it does not have the merit of having caused the convergence on its own.

Slipping below France, an equivocal compliment

The most spectacular proof of Italian redemption was the moment, in late 2025, when the Italian spread slipped below the French one. Rome was borrowing more cheaply than Paris relative to Berlin: an unprecedented inversion, instantly turned into a trophy. Here too the reading deserves to be turned around. If Italy slipped below France, it was at least as much because France disappointed as because Italy shone. Over 2025, the Italian spread tightened by 40 points while the French spread tightened by only 6, weighed down by a fiscal instability we analysed in our piece on French rates. The ranking flipped because the rival fell back, not only because the runner sped up.

And the fragility surfaces the moment the wind turns. In the first quarter of 2026, the shock of the Iran war hit the BTP harder than the OAT, pushing the Italian spread some thirty points above its pre-war level and back above France. In the calm, Italy holds; at the first stress, it remains the first to be sold. The trompe-l’oeil dissolves precisely when it would be most needed.

What the calm forgets

Beneath the tranquil surface, the underlying numbers have not vanished. Italian public debt is still expected around 136% of GDP by 2028, and growth, 0.5% in 2025 and 0.7% in 2026, is too weak to erode that burden through the denominator. The deleveraging path is only due to resume after 2027, once the superbonus drag on revenues fades. Until then, Italy sails by sight between a recovery plan that is ending, an election in 2027 and an ECB backstop that is little discussed but works in silence.

That backstop is the Transmission Protection Instrument, the anti-fragmentation tool created in 2022, which durably lowered the correlation between rate expectations and peripheral spreads. As long as it hovers, the redenomination risk, the spectre of a euro-area break-up that blew spreads apart in 2011, stays capped. But the instrument is conditional and discretionary: were the gap to settle durably at a high level and Rome-Brussels relations to sour over the fiscal rule, its conditionality would again become the heart of an already divisive debate within the Governing Council. Italy’s calm rests in part on an implicit promise no one has yet been forced to test. Some investors are indeed starting to grow wary of it, as the government’s political troubles mount.

The other reading: resilience is earned

Should Italy’s spread be reduced to a mirage manufactured by Germany? That would go too far the other way, and honesty demands acknowledging what is solid in the current regime. That the convergence came mechanically from the Bund takes nothing away from a remarkable fact: when core yields rise, the historical rule is that peripheral spreads widen, because investors flee risk. This time, Italy held firm while the Bund climbed. Not widening in a bond bear market is itself a performance, and it signals that the political risk premium attached to the BTP has structurally fallen.

The foundation of that resilience is anything but illusory. The primary surplus, the stability of a government among the longest-lasting of the Republic, the execution of the recovery plan and the return of €121 billion of foreign capital sketch a genuine improvement, not a stroke of luck. And the Transmission Protection Instrument, whatever one thinks of its untested character, has indeed removed from the market the most destructive tail risk, redenomination. One may fairly argue that Italy earned the right to enjoy the Bund’s normalisation, where others would have squandered it.

The truth, then, lies in between, and that is what makes the case interesting. The Italian spread at 65 points is at once a real compliment and a half misunderstanding. The real test has not yet taken place: it will come when the Bund’s tailwind fades, or when the 2027 electoral deadline draws near. That day, we will learn whether Italy’s calm was borrowed from German supply or earned in its own right. For now, Rome pockets a dividend it did not author alone, and pretends not to notice.

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Sources

• Il Sole 24 Ore, “Seven rating promotions and spread fall: the BTp’s year of grace” (seven upgrades, Moody’s Baa2 on 21 November 2025, breakdown BTP 3.46% versus Bund 2.7%, Italian spread -40 bp and French -6 bp, deficit 2.98%, foreign holdings €1,038.4bn)
• Amundi Research Center, “View on Italy and its government debt” (2024 primary surplus, only G7; debt ~136% by 2028; Iran shock on the BTP; role and conditionality of the TPI)
• Reuters (via Investing.com), “Markets falling out of love with Italian debt as Meloni’s problems mount”