Hedge funds are betting against Rome’s liabilities as S&P Market Intelligence data indicates investors have amassed a $37 billion short bet against Italian debt. The hedge funds are betting large against Italian bonds and investors haven’t bet this high against Rome since 2008, as Italy faces political uncertainty, an energy crisis, and an inflation rate of 8.4% in July.
Investors Expect Italian Debt Default Amid Country’s Shaky Bond Market, Energy Crisis
Italy’s economy has been volatile in recent times as the Ukraine-Russia war has wreaked havoc on the European country adjacent to the Mediterranean coastline. It is facing an energy crisis, and residents of Italy are being asked not to heat their homes this winter. The Italian economy has people speculating that it’s only going to get worse and reports show a massive number of investors are shorting Rome’s liabilities.
The bond borrowing scheme demonstrates how Italian debt is borrowed by investors to speculate that the value of the assets will fall before they are due for repayment. S&P Market Intelligence data shows €37.20 billion of Italian bonds were borrowed by August 23. It is the most bonds borrowed in a single month since January 2008, during the Great Recession. Italy continues to produce high rates of inflation, with Italy printing 7.3% in May, 8.5% in June, and 8.4% July.
According to market speculation, the shortfall of $37 billion suggests that Rome may default. The financial shock could spread across Europe like an epidemic. Italy has been known historically for its strong economy, but it is heavily dependent on Russian gas. The International Monetary Fund (IMF) warned last month that Italy’s economy would see a 5% contraction due to Europe’s tensions with Russia over the Ukraine-Russia war. Italy’s economic downturn is taking place amid India surpassing the U.K. as the world’s fifth largest economy.
Reports noted in July that Italy and the country’s prime minister, Mario Draghi, have not done enough “to kick-start growth.” Despite Draghi’s pledge to save the euro in July 2012, Italy is struggling and the country pays the highest premium to borrow bonds after Greece. Holger Schmieding, an economist at Berenberg, said: “Draghi is trying, has done a little bit here and there but neither I nor the market are yet convinced that trend growth in Italy is strong enough.”
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