(Bloomberg) -- Prime Minister Giorgia Meloni is increasingly counting on the same people who propelled her to power to keep Italy solvent: its citizens.

With the country enjoying rare respite in financial markets just as it sells among the most bonds in its history, the premier and her government are leaning ever harder on consumers. 

Getting ordinary savers to buy debt, along with avoiding any worsening in the public finances, are now key pillars of Rome’s strategy to stay sustainably afloat. Italy’s issuance to retail investors dwarfs that of other European countries, and with a new series of such bonds coming in late February, recent experience suggests demand will stay vigorous.

That would be another fillip for Meloni, who has started the year on a strong footing, having just emerged from a string of ratings reviews on Italy with the threat of a downgrade to junk lifted. The yield spread between its bonds and German equivalents, a key measure of euro-area risk, just touched a two-year low.

Such a sweet spot can’t obscure the country’s vulnerability compared to peers, with debt as a percentage of gross domestic product stuck around 140%, the region’s highest such ratio after Greece. The costs of servicing that are poised to soar too.

“A huge public debt burden and anemic growth prospect make Italy highly vulnerable to sovereign risks,” said Simona Delle Chiaie, an economist at Bloomberg Economics. 

The European Central Bank reckons that about a fifth of the country’s bonds will mature and need replacing in the space of a year, a notably higher proportion than other big borrowers such as France.

Like many peers, Italy’s public-finance requirements aren’t getting any less either — from funding the climate transition to renewed defense spending and a swelling pension bill at a time of demographic change.

With such fiscal headwinds, Meloni knows this is a precious moment that can’t be squandered, with Italy’s bond spread over German equivalents having traded below 150 basis points in recent days.

“Italy is not doing anything particularly radical in terms of structural reform, but equally it’s not doing anything particularly wrong at the moment,” said Charles Diebel, head of fixed income at Mediolanum International Funds in Dublin, who has observed “very strong” demand so far from savers and reckons the spread will further narrow. “For this year I think we have narrowed a lot already, it’s never going to be a straight line but I reckon we could get to somewhere around 140.”

Meloni knows that it wasn’t always this way, having experienced turbulence up close. In 2011, when she was a minister in Silvio Berlusconi’s government, it collapsed as the spread reached 570 basis points. Two days after taking office as premier in October 2022, she watched UK Prime Minister Liz Truss get forced out of her job after investor pushback against her economic policies.

Given such experiences of fickle markets, Finance Minister Giancarlo Giorgetti has said he’s more than happy to have a bigger percentage of debt in domestic hands — because it tends to offer a more stable base of investors who are less inclined to offload bonds at the first hint of tensions.

Italian citizens are playing ball: attracted by rates that beat those on bank savings, they poured €120 billion ($130 billion) into bonds in the first 10 months of last year, according to Bank of Italy data.

The country’s borrowing needs are vast though. Italy plans to sell as much as €360 billion of medium to long-term-maturity bonds in 2024, the most of any euro-area country.

Meanwhile interest payments as a share of GDP have jumped 35% in the past five years and will jump another 27%, according to Bloomberg economists. 

By 2027, the overall cost could surpass the 5% of GDP level reached in 2012 at the height of Europe’s debt crisis — in a scenario that assumes a benign environment for borrowing. 

The shift to retail investors is in part a Europe-wide one, with holdings of state debt among residents rising in Spain and Portugal too.

For many countries, Japan provides a recent trailblazing example of the advantages of selling to citizens. From 2003 to 2008, households there almost tripled holdings in terms of money invested in state bonds — a policy that helped the country keep yields low despite mammoth debt that is close to 250% of GDP.

Meloni government’s approach harks back to the 1980s and 1990s, when short-term bonds known as Buoni Ordinari del Tesoro became so popular that savers who bought them were termed “BOT people” — an expression that entered the dictionary and is still used today. 

She still has a ways to go to reach those levels of debt in Italian hands. To ensure a constant flow of new loyal consumers, today’s BTP Valore bond even pays extra to holders who keep them until maturity. 

At little more than a 10th of overall issuance, the ratio of such holdings remain far below their historical highs or even their average this century of about 20%, according to Bloomberg Intelligence.

High yields compared with bank savings accounts — and the poor returns of prior years with ultra-low rates — are the main draw. In July, they helped the government raise more than €18 billion, a record amount for such a sale.

Less dependence on borrowing from banks would be no bad thing too, not least since they do so disproportionately in Italy — an entanglement with the public finances that gave rise to the “doom loop” of Europe’s debt crisis.

That turmoil is a far cry from the current juncture. Even more could go right for Meloni: European Union funds flowing into Italy’s economy are likely to buoy growth in the coming year, according to the European Commission — a prospect that could support the country’s precarious fiscal position. 

But the need for luck there — and avoiding another cost-of-living shock, for example — also illustrates how Meloni is short on options, not least as she manages a fractious coalition whose members want to meet fiscal promises to voters. 

“Meloni’s biggest liability remains the economy,” said Federico Santi, a senior analyst at Eurasia, a political advisory firm.

While her government is selling stakes in public companies and generally rearranging public assets to rustle up some cash, that process is proving lengthy. An attempt to get money from taxing banks’ extra profits effectively failed. 

So Meloni and her colleagues little choice but to rely on people — and not just for political support and tax money. They need voters to literally to invest in their policies. 

--With assistance from Zoe Schneeweiss, Aline Oyamada, Sujata Rao-Coverley, Giovanni Salzano and Demetrios Pogkas.

©2024 Bloomberg L.P.