Is the decreasing spread really thanks to Italy?

Is Italy really gaining confidence in the financial markets? The BTP-Bund spread suggests yes, considering that it is around 123 points, something that hasn't happened since November 2021.
The differential between the ten-year government bonds of Germany and our country has always been the yardstick for assessing the condition of economic solidity and credibility on Italy's public finances, particularly observed for its high debt in relation to GDP.
An evidently declining spread, combined with the extraordinary success of the government bonds recently issued by the MEF, have reignited the debate on Italy's ability to gain confidence in growth and efficiency.
However, the careful gaze of investors, analysts and observers, including foreign ones, continues to notice shadows on the Italian future.
In essence, despite signs of recovery, Italy remains in danger due to its debt and the inability to seriously reduce it over time.
read also Is Italy entering a recession? The (real) reasons for the decline in the BTP-Bund spread.
Even abroad, the declining trend in the BTP-Bund spread has not been overlooked: the gap between the yield on Italian government bonds and those on equivalent German bonds – a carefully monitored signal of the investor confidence in the riskiest Italian assets – reduced last week to 1.15 percentage points (115 basis points), a 26-month low we read on Reuters.
However, most analysts say the outperformance of Italian government bonds is mainly driven by interest rate expectations and European Central Bank policy and has little to do with the economy and the Meloni government's public finances.
“The spread continues to narrow as investors rush to lock in yields near levels not seen in over a decade,” noted Erjon Satko, rates strategist at BofA.
With markets pricing in the ECB's interest rate cuts starting in June, potential buyers are attracted by the yields still offered by Italian BTPs and see country risk limited by the prospect of Frankfurt's measures to reduce spreads, if necessary.
“We are now in what I call a nationalization of the European bond market where one market maker – the ECB – can potentially stop any speculation against sovereign debt,” said Christopher Dembik, senior investment advisor at Pictet AM.
Not only.
For the first time in recent decades, Germany has probably stolen the show from Italy when it comes to pessimistic forecasts on economic conditions.
An established technical recession, an industrial crisis that blocks recovery, a climate of general consumer distrust and a government in the balance have weakened the locomotive of Europe, transforming it into the sick man of Europe.
read also Italy, will the BTP boom end? There is alarm about the debt, here's why.
Consequently, if at the beginning of 2024 the BTP had a yield of 3.71%, little changed from the current one, the same cannot be said of the German ten-year bond.
The Bund yielded just over 2% in January and today it is trading at 2.45%.
The reduction in the spread, therefore, depends a lot on the jump in yields in Germany, a symptom of a lack of confidence in the country's recovery.
Analysts, on the other hand, never tire of noting that the budget deficit in the eurozone's third-largest economy was equal to 7.2% of output last year, more than double the estimated average of 3.2% for the bloc of 20 nations.
Italian debt mistrust Commerzbank said in a note to clients that the rally in Italian government bonds will likely peter out in the second half of the year due to worsening growth prospects and public debt.
Citibank warned this month that the recent decline in Italy's debt-to-GDP ratio is likely to ease, if not reverse, in the coming years due to stubbornly high financing needs.
At 2.9 trillion euros, Rome's debt is one of the largest in the world, amounting to 137% of gross domestic product at the end of last year, the second-highest ratio in the eurozone after that of Greece.
Despite such a level of debt, the Meloni Government increased the budget deficit target for the following year to 4.5% of GDP compared to the 3.4% inherited from its predecessor Mario Draghi.
It should be highlighted that the main reason for this imbalance in the accounts is a tax relief plan that turned out to be infinitely more expensive than expected.
Introduced in 2020, the so-called “Superbonus” was originally supposed to cost €35 billion over 15 years, but the Treasury now estimates that a staggering €150 billion has already been spent.
Most worryingly, the scheme will weigh on public finances until 2035 as beneficiaries continue to deduct construction work from their taxes, putting constant upward pressure on public debt.
The alert over Italy is still high.
The debt-to-GDP ratio has fallen from its 2020 peak due to the post-pandemic growth recovery and soaring inflation.
However, experts on Reuters note, both factors are weakening.
“The debt-to-GDP ratio will likely increase significantly from now on without a noticeable reduction in the budget deficit,” Commerzbank analyst Marco Wagner said.
Analysts see Italian growth of just 0.7% this year, against Rome's official forecast of 1.2%.