Southern Europe is one of the most water-stressed regions globally. Frequent droughts, record-high levels of tourism, and aging and inefficient water infrastructure cause water availability to fluctuate across the region. S&P Global Ratings sees water stress as key to understanding the challenges associated with water use and supply in Southern Europe.

Why it matters:  Spain and Italy face increasing water demand, while water availability is uneven and subject to variable rainfall patterns and frequent droughts. Maintaining reliable access to sufficient water will only become more important to sustain economic activity and, in particular, tourism, a key engine of growth.

What we think and why:  Water stress may undermine LRGs' credit profiles by reducing economic activity and increasing budgetary pressures. Regions that depend on agriculture and tourism or have water-intensive industries run the risk of higher input costs eroding their economic competitiveness. Regions with the highest levels of water stress will need to invest in their water storage and distribution networks to avoid leakages and upscale their storage capacity.

The impact on LRGs' creditworthiness will depend on their ability to make the necessary investments in a gradual but sustained way to avoid sudden budgetary shocks. The impact will also depend on LRGs' ability to mobilize resources at other levels of government and the policy actions they take to achieve this.

Droughts, Population Growth, And Tourism Spell Water Stress

Spain and Italy have both experienced increasing hydrological volatility, including droughts that have added to the pressure on the water system in regions characterized by population growth and water-intensive economic activity.

From Oct. 1, 2022, to Sept. 30, 2023, the hydrological year, Spain's rainfall was 12% lower than normal. The situation was particularly acute in Catalonia and large parts of Andalusia and the Canary Islands. This prolonged dry spell led to critical water shortages, particularly in Catalonia, where the authorities brought in measures to restrict demand.

In 2022, Italy experienced its driest year since 1800, with a 30% decrease in annual rainfall. In 2023, snow levels in both the Alps and Apennines were below historical averages, with the snow water equivalent down by 64% as of February 2024 compared to the previous year. Academic research suggests a long-term decline in the snow water equivalent in the Italian Alps (Marty et. al, Journal of Hydrometeorology).

At the same time, both countries have seen episodes of heavy rainfall. For example, Spain saw record-high rainfall in March 2025, allowing it to replenish its water reserves. However, drought remains a concern in the medium-to-long term, especially as the population and tourist numbers continue to rise.

From 2014 to 2024, Spain's population grew by 4.6%, or more than 2 million people, and tourism is booming. The country attracted 93.8 million visitors in 2024, more than 12% above the pre-pandemic level in 2019, making Spain the second-most visited country in the world. Italy's population has declined slightly in the past decade, but tourism has reached historical highs, with 65.0 million visitors in 2024, above the pre-pandemic peak of 64.5 million in 2019.

While water stress affects both countries, the northern regions will see much less of an impact than the southern regions in the short term, although even the northern regions are not immune to water stress.

Water Stress May Affect LRGs' Creditworthiness Via Two Main Channels

Economic activity, tax bases, and regional revenues

Regional economies with strong agricultural sectors, a high dependence on tourism, or water-intensive industries may see water stress affect economic activity directly. For example, water restrictions, rationing, or higher prices may erode the competitiveness of regional economies.

For example, Andalusia's olive oil industry has suffered from poor crop yields in recent years, and these have led to shortages and elevated prices. In Sicily, some tourist areas faced water restrictions and rationing during the summer of 2024, affecting the visitor experience.

Budgetary pressure

This may result from LRGs incurring extraordinary expenses to deal with acute water shortages. In extreme cases, this could involve purchasing water storage or an auxiliary supply. LRGs could also step up their investments to improve the quality of the water infrastructure. Investments could aim at avoiding leaks, increasing efficiency, and expanding supply and storage capacity. Such extraordinary expenses may put pressure on regional budgets.

Water usage by households--which constitutes the majority of consumption in Spain and Italy, at close to 70% of total consumption on average--is a major concern in the context of water scarcity and may also require additional investments to reduce water wastage and/or promote water savings.

Water Losses Point To A Large Pent-Up Need For Investment

Water distribution networks are highly complex systems that often have many operators, even within the same territory. We can use water losses--measured as a percentage of unregistered water versus total water admitted to the network--as an indication of the quality of these networks, and therefore the potential need for additional investments.

We understand that it is difficult to fully eliminate losses from water networks due to the wide-ranging and diverse nature of their distribution around the territory. The investments required to achieve zero losses would likely not be viable or economically rational in the short run. However, as water becomes increasingly scarce, we expect the need for such investments to become more pressing.

In our view, long-term planning and sustained investments in maintenance are less likely to undermine LRGs' credit quality than large, urgent capital projects. Furthermore, delaying such investments increases the need for extraordinary and costly ad-hoc solutions to temporary droughts. Such solutions would exert sudden pressure on LRGs' finances without addressing the root cause of the problem.

In all cases, preserving water by avoiding leakage or evaporation from aging infrastructure is a crucial concern and highlights the need for investment. Water losses in Spain and Italy are in the range of 30%-50% of total distribution for most regions. By comparison, U.S. public water utilities suffer water losses of 10%-20% of total distribution (see "Lost Water: Challenges And Opportunities," published Sept. 6, 2023). In our view, the larger losses in Spain and Italy are the likely consequence of underinvestment in the networks, although other factors may also be at play.

Spain: Water Stress Is A Countrywide Concern, But Regional Differences Abound

Water stress affects regions in the southeast of Spain and the Balearic Islands most acutely, according to the World Resources Institute. At the same time, these regions have higher water intensity-to-GDP ratios due to the importance of tourism and agriculture, sectors that consume large amounts of water. Higher water intensity to GDP indicates that more water is necessary to generate each unit of economic output.

Murcia and the southeast of Andalucía (Almeria) are dealing with this problem through desalination plants, which help to ensure the availability of water. However, desalination tends to increase the cost of water, which could make these regions' agricultural sectors less competitive in the long run. On the other hand, Murcia, Andalucía, and the Balearic Islands have low water losses relative to Spain as a whole, suggesting a high level of awareness of the limitations they face (see table 1 and chart 1).

Table 1

Chart 1

Areas like Madrid, which face relatively high water stress, mostly due to high population density, benefit from an economy that is less reliant on water. Madrid, for example, has a high concentration on services and competitive water costs. This may mitigate Madrid's exposure to the economic consequences of water stress in the short run. Moreover, water losses in Madrid are the lowest in the country, although we expect that maintaining these levels of efficiency will require continued investments over the long term.

The northern regions of Spain with wetter climates and greener landscapes (Galicia, Asturias, Cantabria, and the Basque Country) show lower levels of water stress and relatively low water intensity to GDP, with competitive water costs thanks to the relative abundance of the resource. However, except for the Basque Country, these regions have some of the highest water losses in the country and comparatively high consumption of water by households, particularly in Cantabria.

In our view, the historical abundance of water in these areas has likely made investments in efficiency, storage, and supply less pressing than in other parts of the country. However, while these regions are less exposed than others in the short term, they may not be immune from worsening water stress.

Even regions with low structural water stress can experience acute water shortages

For example, Catalonia experienced severe water shortages during the summer of 2024. These required the authorities to take extraordinary measures to reduce consumption, such as implementing water usage restrictions and lowering water pressure in the network. In recent years, Catalonia has resorted to delivering water via boats from other parts of Spain or abroad, which is a very expensive and short-term solution.

There are marked differences in the intensity of water scarcity within territories. For example, in Catalonia, the metropolitan area of Barcelona has been experiencing difficulties far more severe than the areas around the Ebro River or territories closer to the Pyrenees mountains. However, sharing resources across river basins can be expensive, technically complex, and fraught with political controversy.

Absent a resolute policy response, water stress is likely to worsen in some Spanish regions, but most acutely in those that are already at more risk of shocks. Over the longer term, water stress could worsen even in northern regions that currently appear relatively insulated from this issue.

Italy: Another North-South Divide

Northern regions near the Alps--such as Valle d'Aosta, Piedmont, Lombardy, Liguria, Trentino-Alto Adige, Veneto, and Friuli-Venezia Giulia–-benefit from relatively low water stress due to abundant winter snowfall that sustains river basins and lakes.

However, the picture in the North is nuanced. Despite their favorable water availability, regions like Veneto and Lombardy exhibit high water-usage intensity due to extensive industrial and agricultural activity, while Trentino-Alto Adige and Valle d'Aosta show elevated domestic water consumption.

The water infrastructure in the North appears generally sound when measured in terms of water losses. Yet these areas are not entirely insulated from risks. Shifting climactic patterns could make periods of water scarcity more frequent, with the drought in the summer of 2022 being a case in point. This underscores the importance of proactive investment, although the urgency may be lower than in the South.

Moreover, agriculture in the North is heavily reliant on rainfall water, especially during the summer months. Despite abundant resources, the region's water retention and collection capacity fall short of benchmarks set by leading agricultural areas in Europe, revealing a critical vulnerability in sustainable irrigation.

Water storage is inadequate, especially in the southern regions

While some Italian regions benefit from ample precipitation, they only retain about 11% of the water for consumption because of inadequate water storage infrastructure.

Italy's water infrastructure is quite old, with 60% of the network over 30 years old and 25% over 50 years old. In 2022, 42% of extracted water was lost in the distribution networks, placing Italy among the worst countries in Europe for water leakage, despite the country's relative water scarcity.

Southern regions of Italy, which face the highest levels of water stress, also see the greatest water losses (see table 2 and chart 2). In Sardinia, Molise, and Sicily, over half of the water is lost, while Basilicata and Abruzzo report losses exceeding 60%. The outlook for the South is particularly concerning, with water stress set to worsen in the coming decades.

Table 2

Chart 2

A critical factor in this disparity lies in the management structures of the water networks. In the North, water distribution tends to be more centralized and is often entrusted to private operators, enabling economies of scale, greater investment capacity, and improved efficiency. In contrast, Southern Italy operates through a fragmented, highly localized system. Local authorities and small municipalities manage their own water systems and tend to underinvest compared to larger, centralized players, whether public or private.

Financially, these inefficiencies translate into higher costs for consumers, as local, typically smaller, players incur additional costs to maintain their network because they don't benefit from economies of scale.

Investment levels vary

In 2022, the average annual water bill for an Italian household consuming 192 cubic meters of water was €487. However, regional variations are notable, from €115 per year in the City of Milan to €330 per year in Puglia on average. These differences reflect not only operational efficiencies, but also varying levels of investment in infrastructure across regions.

In Southern Italy, per capita investment is significantly lower than in the northern part of the country. Although investments have picked up in recent years, substantial investment gaps remain, especially in regions with higher infrastructure needs and fragmented water sectors.

That said, investment in Italy's water sector has been steadily increasing over the last decade, partly thanks to incentives by Italy's utilities regulator, ARERA, with larger firms driving higher spending thanks to economies of scale and better access to capital markets. In 2022, Italian water operators invested an estimated €64 per capita, more than double €31 per capita in 2012, and we believe that this figure could increase further in the years to come.

However, the sector remains highly fragmented and dominated by small operators, which struggle to make long-term investments. For instance, Sicily alone has over 50 water distribution operators, creating structural obstacles to optimization and efficiency. This decentralized approach may, in our view, hinder the region's ability to modernize and address its acute water-management challenges.

Investment In Water Infrastructure Is A Marathon, Not A Sprint

Growing water scarcity in Italy and Spain presents significant challenges for all tiers of government that must supply adequate amounts of safe, clean water. These challenges affect all aspects of the water cycle, namely:

• Improving the collection and distribution of water by eliminating losses and upgrading the storage infrastructure.
• Transporting water efficiently to areas where it is most needed.
• Ensuring efficient water use by accurately measuring consumption.
• Treating water properly to avoid pollution and allow for reuse.

While regulatory changes push for increased centralization of water management, investments are still low. The Italian National Recovery Resilience Plan has allocated €4.3 billion for the protection of hydric resources, just 1.8% of the total €226 billion available under this plan.

We believe that investments to improve the water network and make it more efficient will require sustained financial efforts that may put pressure on LRGs' budgets in both countries. The actual impact on LRGs' budgets, debt, and ultimately, creditworthiness, will depend on the availability of funding from central government and the EU, and on how much of the costs this funding covers.

On the other hand, a failure to address the challenges because of underinvestment could also damage LRGs' creditworthiness in the medium term. Chronic water scarcity may depress economic growth potential, hence LRGs' tax bases and budgetary performance. Acute stressors and infrastructure failures may require urgent and expensive investments in repairs and adaptive improvements. LRGs therefore face tough choices.

How Water Stress May Affect Our Ratings On Spanish And Italian LRGs

The economic and budgetary forecasts underlying our Spanish and Italian LRG ratings do not reflect the climate scenarios that we detail in this report. Instead, we focus on the financial pressures that water scarcity and underinvestment in infrastructure place on LRGs as these pressures become visible.

Evaluating LRGs' changing exposure to physical climate risks can inform our view of their preparedness for worsening climate hazards, including water stress, and the potential impact on their credit quality (see "Hot Spots: Subnational Regions Outside The U.S. Face Rising Physical Climate Risks," published Nov. 12, 2024).

How much influence water stress ultimately has on our LRG ratings will largely depend on the degree of collaboration between various tiers of government in planning and investing to mitigate the stress. We continue to monitor how the authorities approach sustainable water management, economic growth, and the planning and financing of improvements to water-related infrastructure. We will incorporate these risks into our assessment of credit ratings as soon as they become measurable and material.

Strategies aimed at securing sustainable economic growth involve costs and trade-offs, presenting significant challenges for communities and policymakers as they address their exposure to water stress.

Appendix

Path to credit materiality

Climate change is a megatrend that can have material effects on the creditworthiness of issuers and debt instruments. It is also one of the key risks we identify in our credit conditions publications (see www.spglobal.com/creditconditions). The effects could manifest through:

• Climate transition risks associated with the pace and extent of efforts to reduce greenhouse gas emissions and limit the global temperature rise to well below 2 degrees Celsius (2 C); and
• Physical climate risks, stemming from rising global temperatures, which the Intergovernmental Panel On Climate Change reports will result in increasingly frequent and severe physical climate hazards, such as wildfires, storms, and flooding; and chronic events like changing temperature and precipitation patterns, as well as rising sea levels.

Clarity on how and when climate transition and physical climate risks are transmitted to creditworthiness is generally low, since the transmission channels tend to be indirect and vary across sectors.

Scenario analysis can help deepen our understanding of how climate transition and physical climate risks in different sectors or regions may evolve over time and affect ratings. This type of analysis is particularly useful when uncertainties are high, as is generally the case for climate risks, since it can provide insight into a range of possible outcomes and highlight potential vulnerabilities.

We describe plausible long-term scenarios to help illustrate the potential impacts of climate change on credit transmission channels and ultimately on creditworthiness in "White Paper: Scenarios Show Potential Ways Climate Change Affects Creditworthiness," published July 25, 2024.

Shared socioeconomic pathways (SSPs) defined

The Intergovernmental Panel On Climate Change's SSPs are a set of scenarios for projected greenhouse gas emissions and temperature changes. They incorporate broad changes in socioeconomic systems, including population growth, economic growth, resource availability, and technological developments.

• SSP1-2.6 is a low emissions scenario in which the world shifts gradually, but consistently, toward a more sustainable path. This SSP aligns with the Paris Agreement's target to limit the average increase in the global temperature to well below 2 C by the end of the century. The global temperature is projected to increase by 1.7 C (a likely range of 1.3 C-2.2 C) by 2050, or by 1.8 C (1.3 C-2.4 C) by the end of the century.

• SSP2-4.5 is a moderate emissions scenario, consistent with a future with relatively ambitious emissions reductions, but where social, economic, and technological trends don't deviate significantly from historical patterns. This scenario is close to countries' current pledges but falls short of the Paris Agreement's aim of limiting the global temperature rise to well below 2 C, with a projected increase of 2.0 C (1.6 C-2.5 C) by 2050 or 2.7 C (2.1 C-3.5 C) by the end of the century.

• SSP3-7.0 is a medium-to-high emissions scenario, akin to a slow transition, in which countries increasingly focus on domestic or regional issues, with slower economic development and lower population growth. A low international priority for addressing environmental concerns leads to rapid environmental degradation in some regions. This SSP projects a global temperature increase of 2.1 C (1.7 C-2.6 C) by 2050 or 3.6 C (2.8 C-4.6 C) by the end of the century. We take this scenario as a reference point as we currently view it as the most likely to materialize.

• SSP5-8.5 is a high emissions (limited mitigation) scenario in which the world places increasing faith in competitive markets, innovation, and participatory societies to produce rapid technological progress and the development of human capital as a path to sustainable development. This SSP projects the global temperature increase at 2.4 C (1.9 C-3.0 C) by 2050 or 4.4 C (3.3 C-5.7 C) by the end of the century.

Related Research

• Hot Spots: Subnational Regions Outside The U.S. Face Rising Physical Climate Risks, Nov. 12, 2024
• White Paper: Scenarios Show Potential Ways Climate Change Affects Creditworthiness, July 25, 2024
• Lost Water: Challenges And Opportunities, Sept. 6, 2023

External Research

• Recent Evidence of Large-Scale Receding Snow Water Equivalents in the European Alps, Christoph Marty, Anna-Maria Tilg, and Tobias Jonas, Journal of Hydrometeorology, April 1, 2017