What Can Croatia Learn from Italy About National Bonds?

Financing the state through bonds in which citizens can invest has taken root in Croatia, but countries with much longer experience with such a model are facing the problem of further motivating small investors. An example comes from across the Adriatic, where, according to analysts, Italy will become increasingly difficult to attract small domestic savers to its enormous public debts. However, foreign investors, attracted by the stability of the current government of Prime Minister Giorgia Meloni, which has lasted for two and a half years – a significant achievement in the context of Italian politics – and an improved financial picture, may fill any potential gap in demand, writes Reuters.

Many still vividly remember the financial earthquake of 2011 when the eurozone was at the peak of the debt crisis. The sell-off in international markets widened the yield spread between German and Italian bonds to 500 basis points. The consequence of that debt storm was the fall of Silvio Berlusconi’s government. Learning from that experience, Italy has been trying since 2012 to attract small investors to government bonds, believing that they are less likely to withdraw money during times of market instability.

In other words, the larger the share of debt held by citizens, the more resilient Italy is to the fears of financial markets and investors regarding the state of public finances in the eurozone’s third-largest economy. However, these fears are not entirely unfounded; data from the Bank of Italy shows that by the end of 2024, public debt reached a record three trillion euros. The government in Rome expects that by 2026, the share of public debt in relation to the economy will rise to 138 percent, up from 135 percent in 2023.

Exhausted Citizens

Rome’s attempts have so far borne fruit. Through a series of ‘national bonds’, the government has raised about 245 billion euros, increasing the share of small savers in the three trillion euros worth of debt from 13.5 to nearly 15 percent in November, according to the latest data from the central bank. Of this, foreign investors currently hold a third of the debt. The latest issue of government bonds ‘BTP Plus’ raised 14.9 billion euros in February. Italian interest in government bonds peaked two years ago when they invested 44 billion euros in them. However, in the future, the Italian government can expect decreasing interest in such types of investments, analysts assess.

There are several reasons for such a scenario. The first is the jump in inflation between 2022 and 2023, which has eroded part of the savings. Deposits of Italians in domestic banks fell from a record 2.86 trillion euros in April 2022 to 2.3 trillion euros last December, the lowest level since early 2017. Therefore, citizens have little maneuvering room for additional investments in government debt. The second reason is the cycle of interest rate cuts by the European Central Bank (ECB). This effect is very clearly visible in the example of Croatian national bonds. The first issue from March 2023 offered an interest rate of 3.65 percent per annum, while the third ‘national’ issue that the Ministry of Finance is currently placing will have an interest rate of at least 2.60 percent.

UniCredit analysts Luca Cazzulani and Francesco Maria Di Bella estimate that the net contribution of households to servicing Italy’s financial obligations this year will amount to about 50 billion euros, at the level of last year, but far less than the 130 billion euros from 2023. Italy must raise 350 billion euros this year to repay maturing debts, and given that the ECB ended the PEPP pandemic bond-buying program in December, new investors need to be found.

All is Well… for Now

In Rome, it is believed that foreign investors seem to be the solution. Foreign creditors have already significantly increased their investments in Italy’s debt. In November, foreign investments in Italian government bonds reached the highest level since the introduction of the euro in absolute terms, at 771.4 billion euros. Foreign investors are attracted by the relatively high interest rate, political stability, and a decrease in the budget deficit, which fell from 7.2 percent in 2023 to 3.4 percent of GDP last year. For this year, the Meloni government aims for a deficit of 3.3 percent.

For now, no one is paying attention to the possibility that Italian debt could again be the target of a sell-off in the event of another shock in the financial markets. In Rome, they are hoping for the best.