This crossing of the five-year threshold is certainly symbolic, but it marks a turning point. Until now, the hierarchy among European sovereign debts seemed solid. However, with public balance sheets coming under increasing scrutiny, investors are revising their assessment of the economic fundamentals of each eurozone country.
Meloni, a factor of confidence
The yield spread between Italian and French 10-year bonds has fallen to 17 basis points, its lowest level since 2007, compared with nearly 200 three years ago. Even Germany is no longer immune to this convergence.
The markets were not particularly confident about the idea of a figure considered extreme right-wing on the political spectrum coming to power. Just look at the rebound in 10-year rates after her election in October. However, her policies have not turned their back on the markets.
Change in Italian 10-year bond yields (Source: World Government Bonds)
Some analysts point to the political advantage Giorgia Meloni has enjoyed since coming to power. The divided opposition has allowed her to push through a series of budget reforms, which have been met with protests and numerous strikes, but have brought the deficit closer to the European target of 3%.
The market narrative seems to validate her strategy: projecting authority at home and stability abroad.
With higher growth than Germany and stronger fundamentals than France, Italy is inspiring greater confidence. Its risk premium has fallen sharply.
Yield spread between French and Italian 10-year bonds (Source: World Government Bonds)
Find a more in-depth analysis of the markets' renewed confidence in Giorgia Meloni here.
Including an anecdote that highlights the achievement of the head of government: "Since World War II, the average lifespan of an Italian government has been just over a year. But since her arrival at the Chigi Palace in October 2022, Giorgia Meloni has managed to maintain the unity of her coalition."
French debt worries
The situation in France is much less favorable. On average, 23% of public debt is held by non-residents in the eurozone. In France, this figure rises to 54%, reflecting the reputation of OATs (French government bonds), but also a high sensitivity to political turmoil.
The bad news has been coming thick and fast since the political crisis of summer 2024: 10-year yields have exceeded those of Spain and Portugal. Later in 2024, they equaled those of Greece. In November, Moody's downgraded the country's credit rating.
The political factor is not the only reason for these failures. France has one of the highest debt-to-GDP ratios in Europe and is struggling to reverse the trend. The inability to meet the deficit targets set at the beginning of the year reflects a deep structural problem.
Political paralysis, exacerbated by the lack of a majority in the National Assembly, is clearly weighing heavily. Several economic reforms have stalled. And for the past two years, the contrast with Italy's relative stability has been striking.
Prime Minister François Bayrou will announce the country's budgetary guidelines on July 15.
