Goldman Sachs Warns of Italian Government Bond Risks as Widening Deficit Could Push Debt to Europe's Highest
nashnova research
Italy approved €28 billion in extra borrowing over two years for defence and energy, sharply raising its deficit targets; Goldman Sachs warns its debt-to-GDP ratio will climb to roughly 137% — Europe's highest — with sovereign bonds under pressure ahead of elections.
How much more spending, and why did deficit targets jump?
The Meloni government approved €28 billion in additional borrowing over two years, split between defence and energy at roughly 0.3 pp of GDP each.
The 2027 deficit target rose from 2.8% to 3.4%; the 2028 target from 2.5% to 3.2% — both above Goldman's prior forecasts.
This means → after four years of fiscal consolidation, Italy's deficit-reduction path has visibly reversed course.
How high could the debt ratio go?
Goldman economist Filippo Taddei called the new deficit targets a "significant upside surprise."
He projects Italy's debt-to-GDP ratio will keep rising through 2028, stabilising at roughly 137% — the highest in Europe.
He warned further: if 10-year yields structurally break above 4%, the debt ratio will keep climbing beyond 2028. In plain terms = the higher the interest on borrowing, the heavier the repayment burden, and the debt snowball never stops rolling.
Why would elections make fiscal tightening even harder?
Italy's next general election must be held by 22 December 2027. A tight race could squeeze the room for fiscal consolidation.
Taddei notes both left and right lean toward coalition partners who favour higher spending. This means → whoever wins, campaign promises will likely point toward spending more, not less.
Parliament also passed electoral reform this week, shifting toward a more proportional system. The ruling coalition says it aids stability; the opposition calls it a power-consolidation move.
Is this extra spending even allowed under EU rules?
The spending falls under the EU's "national escape clause" — a mechanism letting member states temporarily widen defence and energy budgets in response to the Russia-Ukraine war and Middle East conflicts.
In plain terms = the EU rulebook has a wartime back door — governments can spend more without technically breaking the rules, but the debt is still theirs to carry.
This reflects a deepening tension across Europe between security imperatives and fiscal discipline.
What does the market think — and why are institutions split?
Italy's 10-year BTP yield stood at 4.55%, with a spread of about 108 basis points over the German Bund. France's 10-year OAT yield was 4.85%, as France's own debt troubles keep fuelling broader European fiscal anxiety.
PIMCO sees Italy in a "relatively better position" — its bonds are mainly held domestically (typically a stabilising factor), and it has a stronger primary fiscal surplus plus political stability.
UBS, however, has built a short position on BTPs, betting Italian bonds will weaken. This means → institutions are clearly split, and as budget details land and elections draw closer, the BTP spread will be the market's key test.
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