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    Italy’s public deficit to GDP ratio increased from 2% to 3.4% in the third quarter

    by VT Markets
    /
    Jan 7, 2026
    Italy’s public deficit increased from 2% to 3.4% of GDP in the third quarter. This rise highlights ongoing issues in government spending and the economy. The growing gap between Italy’s income and expenses may hurt confidence and shape economic policies. Both local and international observers are closely watching how rising public debt and financial practices could play out.

    Rising Deficit Concerns

    With Italy’s deficit now at 3.4% of GDP, we are on the lookout for signs of stress in the Eurozone bond market. The difference between Italian 10-year government bonds and German Bunds is crucial, and it is widening to almost 180 basis points. This is a significant jump from the 150 basis point average seen in the last quarter of 2025. This financial strain could put pressure on the Euro in the short term. The one-month implied volatility on EUR/USD options has risen from 6% to over 7.5%, showing that traders expect more currency fluctuations. We expect continued cautious positioning against the Euro until there’s more clarity on Italy’s budget plans. For stock traders, Italian banks face the most risk due to their heavy investments in government debt. In previous stressful periods, such as 2022, a widening BTP-Bund spread led to declines in banking stocks. Therefore, buying put options on the FTSE MIB index could be a smart move to hedge against possible market drops.

    Credit Rating and ECB Vigilance

    Next, all eyes are on credit rating agencies and any comments from the European Central Bank. If Italy’s Baa3 sovereign rating is reviewed or downgraded, borrowing costs could rise sharply. Traders should brace for increased volatility across Italian assets and the Euro in the coming weeks. Create your live VT Markets account and start trading now.

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