Hedge funds are betting big against Italian bonds, and investors haven’t bet this high against Rome since 2008, as Italy faces political uncertainty, an energy crisis and an 8.4% inflation rate in July.
Investors are expecting an Italian debt default due to the instability of the bond market and the country’s energy crisis.
Italy’s economy has been volatile lately as the war between Ukraine and Russia has taken its toll on Italy. The country is facing a major energy crisis and Italian residents are being asked to turn down the heat this winter. The Italian economy has people saying that it will only get worse and various reports show that a massive number of investors are short selling Rome’s liabilities.
Bond borrowing patterns highlight how investors are borrowing Italian liabilities in order to bet that values will fall before the debt redemption deadline. Data from S&P Market Intelligence shows that €37.20 billion of Italian bonds were borrowed as of August 23. The amount of bonds borrowed is the highest since January 2008, during the great recession. Inflation remains very high: 7.3 percent in May, 8.5 percent in June and 8.4 percent in July.
The $37 billion in short positions suggests that market speculators believe that Rome will default and that the financial shock will spread like a contagion across Europe. Italy is traditionally known for having a strong economy, but the country is dependent on Russian gas. The International Monetary Fund (IMF) warned last month that Italy’s economy would contract by 5 percent due to tensions between Europe and Russia over the Ukraine-Russia war. Italy’s economic slowdown comes as India has overtaken the United Kingdom to become the world’s fifth largest economy.
Reuters published an article in July showing that Italy and the country’s prime minister, Mario Draghi, have not done enough “to boost growth.“Despite Draghi’s promise to save the euro in July 2012, Italy is in trouble 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 is yet convinced that trend growth in Italy is strong enough.“