The timing was striking. On Thursday, September 18, as France was partly paralyzed by a day of union-led protests against budget proposals and still lacked a fully functioning government, a historic milestone was reached on the financial markets. For the first time, the interest rate demanded by investors to hold French government debt matched the rate required for Italian government debt. In the eyes of investors, Italy is now considered as credible as France, despite carrying a heavier debt burden.

Early in the morning, the yield on 10-year government bonds stood at 3.475% for both France and Italy. Back in 2011 and 2012, Italy was seen as so volatile, so unreliable both financially and politically, that investors demanded up to 400 basis points (4 percentage points) more than the French rate. When France was paying 3% annually, Italy had to pay 7%. This "risk premium" was still 180 basis points in October 2022. Since then, it has gradually decreased until it reached zero on Thursday.

Since the rates at which the French Treasury issues debt each week are very close to market rates, France should now have to pay as much as Italy to borrow. If the trend continues, it may soon have to pay even more.

This disappearance of the "risk premium" previously applied to Italy compared to France is partly due to Rome's improved standing with investors. Since the peak of the Covid-19 pandemic, Italy under Prime Minister Giorgia Meloni has significantly reduced its public deficit. Investors have also welcomed the country's new political stability and have tolerated a government with increasingly authoritarian tendencies.

By contrast, repeated political crises in France and ongoing uncertainty about future budgetary efforts have unsettled financial markets. Proof of this came on Friday, September 12, when Fitch - one of the three major global ratings agencies - was the first to strip France of its "double A" rating, lowering its long-term credit rating from AA- to A+. In its analysis, the agency said that there was no longer a clear path to stabilizing France's public debt. It also emphasized that the growing debt burden limited the country's ability to respond to new shocks without worsening its public finances.

Italy, on the other hand, could see its credit rating upgraded by Fitch on Friday, September 19, as a reward for improvements in its public finances.

Italy now considered as reliable as France on financial markets