The landscape of sovereign debt in the Eurozone is undergoing a historic shift, with Greece's public debt percentage expected to fall below that of Italy within the year. According to the latest multi-year budget plan (DFP) data released by the Italian Ministry of Finance, Italy's debt-to-GDP ratio is projected to rise to 138.6% by 2026, while Greece’s ratio is expected to decrease to around 137% over the same period. This forecast marks Greece’s official exit from its long-held position as the nation with the highest debt-to-GDP ratio in Europe since the Eurozone sovereign debt crisis.
Sovereign Credit Spread and Valuation Reconfiguration
The initial reaction of the Eurozone bond market to this shift has been relatively steady, yet long-term embedded risks are being re-priced. Italy, as the third-largest economy in the Eurozone, faces more severe interest payment pressures due to its massive debt stock, especially in the context of the European Central Bank (ECB) maintaining a high-interest environment. According to Reuters, citing senior Greek officials, Greece's debt-to-GDP ratio is expected to significantly decrease from 145% in 2025 to around 137% in 2026. This notable trend in deleveraging benefits from Greece’s recent years of unexpectedly high economic growth and sustained fiscal surplus. In contrast, Italy's debt trajectory presents an opposite slope, and although its Ministry of Finance predicts the debt ratio will fall below 137.9% after 2028, short-term marginal deterioration has already prompted rating agencies to reassess the country's fiscal sustainability.
Fiscal Constraints and Structural Deficit Pressure
In the budget draft released on Thursday, the Italian Ministry of Finance outlined the fiscal path for the next three years. The data shows that Italy's debt-to-GDP ratio will remain at the high level of 138.5% in 2027. The core variable causing the divergent debt trajectories of Greece and Italy is the difference in structural fiscal policies. After undergoing long-term bailout programs, Greece established strict fiscal discipline, with a substantial portion of its debt being low-interest official loans. Conversely, Italy has been mired in the fiscal aftermath of the so-called Superbonus tax credit policy, which increased the fiscal deficit while delivering less-than-expected boosts to long-term productivity. If European economic growth slows in the future, Italy, lacking fiscal buffer space, may face further downward pressure on its sovereign rating.
Debt Ceiling Rules and EU Monitoring Mechanism
With the reinstatement of the EU's Stability and Growth Pact, Italy’s fiscal path is under close scrutiny from Brussels. Although the Italian Ministry of Finance forecasts that the debt level will decrease to 136.3% by 2029, this assumption is based on relatively optimistic growth scenarios. Greece's successful deleveraging provides a template for high-debt Eurozone countries, suggesting that continuous structural reforms, attracting foreign direct investment (FDI), can achieve nominal GDP growth outpacing debt growth. However, Italy faces greater challenges in enhancing its potential growth rate due to aging demographics and a rigid labor market. Currently, markets are keenly focused on the spread between Italian and German Bunds, which if exceeding 200 basis points, could trigger renewed concerns over the financial stability of the Eurozone.
