Markets prefer Italy to France

Some major fund managers have begun to reallocate part of their exposure from France to Italy. Few would have believed it a decade ago, and even fewer in the wake of the disastrous Superbonus and Italy’s rise to the top of the European public debt rankings. Yet this is the case. Rome is no longer the main concern of European markets: it has been overtaken by Paris. This reversal can be explained by Italy’s fiscal stabilisation and political stability. For although Italy has a much higher public debt-to-GDP ratio than France, as well as lower credit ratings, in recent years it has reduced its deficit from 8 per cent of GDP in 2022 to 3.1 per cent in 2025 (even though Minister Giorgetti still hopes to bring it below 3 per cent), whilst France’s deficit remains high and is rising: 5.1 per cent in 2026 and 5.7 per cent in 2027, according to the European Commission.
 Consequently, since this summer, the 10-year BTP has yielded less than the equivalent French OAT, with the latter reaching 4.14 per cent last week (its highest level since 2008).

The BTP-Bund spread stood at 82 points yesterday, whilst the OAT-Bund spread stood at 86. There are numerous signs of investors shifting their holdings from French to Italian bonds, according to various strategists interviewed by the Financial Times. The British fund Legal & General, for example, says it has reduced its exposure to OATs, shifting part of it to Italian bonds – a sign that scepticism towards the management of French public finances is growing. France is heading in the opposite direction to Italy: the candidate Jean-Luc Mélenchon, who polls suggest will reach the run-off, has proposed cancelling the French debt held by the ECB, emulating the proposal in the 2018 M5S-Lega government contract that sent the spread soaring. There is no cause for celebration if a cousin is faring worse than we are. But it does help us to better understand the benefits of fiscal discipline and market confidence.