The wheel of the markets turns. While once they were France and Germany to be considered more virtuous and capable of driving the economy of the Eurozone – while Italy was considered the black sheep, together with other Mediterranean countries – now it is our country that is showing some positive signs that the others do not have. While France is struggling with the launch of a maneuver difficult and Germany is officially in recession having marked the second consecutive year of decline, Italy enjoys improving data, also certified by the promotion of the rating agencies.
The most evident result has an impact on the trend of government bonds which, while they are sold in Germany and France, but also in the United States, they are holding up well on the Italian market which can therefore benefit from falling rates, a milestone for its consistent and usual need for refinancing.
“Germany's rock-solid reputation as a top-class team is being eroded,” he says. Antonio Cesarano, chief global strategist of Intermonte “and this has repercussions on the yields of both the German government and companies”.
Rating agencies positive on Italy
The whole of 2024 was a positive year for Italy and BTPs, while it was negative for France and OATs and for Germany and Bunds. Italian 10-year bond yield They are the only ones who have recorded a decline since the beginning of the year of about twenty basis points, from 3,70% to 3,52-54% in recent days. The yields of similar securities French instead they rose by 46 basis points (from 2,56% to 3,02%) and those German of 25 (from 2,03% to 2,28%). Of course, the absolute value of the Italian yield remains high compared to the German ones. But, to put it in the words of rating agencies: Italy is credible in its promises to contain deficits and debt, boasts better economic growth and above all has a political stability that other European giants do not have. Fitch improved the outlook on Italy from “stable” to “positive” while leaving the rating at “BBB”.
France's problems
Le rating agencies they see instead worsening on the French front. Friday Scope Ratings downgraded its rating of France from “AA” to “AA-”, as it had already done last May S&P. The spread between French and German bonds had started to rise with the result of the European elections and the subsequent early vote requested by Macron from the French. So it Oat/Bund spread, that the French were used to seeing in the 60-65 basis point area, have seen it rise to around 75 basis points, with peaks even at 80-85. A few hundredths of a point of difference that can weigh a lot considering that France pays 46 billion euros in interest this year, the equivalent of the Defense budget.
Moreover, France has a deficit higher than expected (estimated at 6,1% in 2024), which according to Scope will remain above 3% also in 2029. While Italy, as he wrote S&P, is doing better than expected and could reach 3,2% in 2025 and 2,7% in 2026. According to Scope, the political situation is also weighing on investments: the scenario for France is “challenging” writes Scope, “and this raises uncertainties about the implementation of the reform agenda and fiscal discipline”. Instead, in Italy, Fitch writes, “political stability, if maintained, will support fiscal consolidation”. Finally, there is growth, which is also slowing down in Italy, of course, but less than in other countries, as Fitch points out: Italian growth is “above the European average”.
A Germany a little less granite-like
There have been no movements on the ratings for Germany at the moment, all still at “Triple A”, but the German Bunds have lost their advantage both in relation to the Italian BTPs, both in relation to the swap rate, Cesarano further emphasizes. The swap rate is an important point of reference, because it is the interbank rate with zero total risk and outside the political dynamics of the various countries: it is the fixed point, the beacon of the market, on which everything can be compared. Usually the Bund yields much less than the ten-year swap rate. In 2022, when Russia invaded Ukraine, the Bund even yielded over 100 basis points less than the swap rate. Then in 2023 it was between -60 and -40 basis points, says the strategist. Then it thinned further to just 18 basis points below the swap rate: a sign of a clear weakening of the German Bund also against the swap. "This data highlights a deterioration in Germany's credit quality perceived by the market. The German economy is suffering and politics is weak, so the market is starting to fear that sooner or later Germany too will be forced to abandon its traditional budgetary rigor,” concludes Cesarano.
