Goldman Sachs Warns on Italian Bond Risks as Deficit Rises Above France

Italy’s decision to raise its deficit targets for 2027 and 2028 has prompted Goldman Sachs to flag mounting risks to the country’s bond market, warning that rising yields and election uncertainty could undermine debt sustainability.

The Italian government, led by Prime Minister Giorgia Meloni, approved an additional €28 billion in borrowing for defense and energy spending on October 2, 2026. This move comes as Italy’s revised deficit targets climb to 3.4% of GDP in 2027 and 3.2% in 2028, both higher than the government’s previous commitments and above the European Union’s 3% ceiling.

Goldman Sachs analysts forecast that Italy’s debt-to-GDP ratio could reach 137% by 2028, the highest in Europe. The bank’s warning echoes recent turmoil in French debt markets, raising questions over whether Italy could face similar challenges as its fiscal position weakens.

The new spending package, which covers both defense and energy initiatives, has been justified by Rome as necessary for national security and energy transition. However, the uptick in borrowing is likely to add to existing market pressures, with PIMCO and UBS Investment Bank both noting that Italian bonds are increasingly sensitive to shifts in investor confidence.

Rising bond yields mean the cost of servicing Italy’s debt could climb, straining public finances and potentially leading to a sell-off in government bonds if investor sentiment deteriorates. Such a scenario would directly affect sectors reliant on state support and could reshape competition within the Eurozone.

Italy’s fiscal challenges arrive as the country prepares for a general election by December 22, 2027, introducing additional uncertainty around future economic policy. According to Goldman Sachs, the risk exists that political instability could lead to looser fiscal discipline, further unsettling markets.

Despite these concerns, some analysts highlight the stabilizing effect of strong domestic ownership of Italian debt, suggesting that local investors may cushion the impact of market volatility—a contrast with France, where foreign holders dominate.

The developments in Rome are likely to intensify debate across the European Union about fiscal rules and budget flexibility, especially as the bloc confronts divergent economic strategies among its largest members. The Italian case could prompt policymakers to revisit frameworks governing debt and deficit limits, with implications for the broader stability of the Eurozone.