Hedge funds are betting $39 Billion against Rome’s liabilities | Paragon Alpha

Hedge funds are betting $39 Billion against Rome’s liabilities

By Matea Gucec

According to S&P Market Intelligence data, investors have accumulated a $37 billion short position against Italian debt, prompting hedge funds to wager against Rome's obligations. As a result of Italy's political unpredictability, its energy issue, and its 8.4% inflation rate in July, hedge funds and investors are placing significant bets on Italian government bonds that they haven't done since 2008.

Amid the nation's shaky bond market and energy crisis, investors anticipate an Italian debt default.

The ongoing conflict between Ukraine and Russia has had a negative impact on Italy's economy and caused other problems for the European nation that borders the Mediterranean Sea. Italians are being urged to lower their thermostats in winter due to the country's severe energy problems. People speculate that the Italian economy will only get worse, and reports indicate that a sizable number of investors are shorting Rome's liabilities.

Schemes for borrowing bonds demonstrate how investors borrow Italian liabilities in an effort to make a wager that prices will fall before the debt repurchase is due. According to S&P Market Intelligence data, Italian bonds totaling €37.20 billion were borrowed as of August 23. Since the start of the Great Recession in January 2008, the amount of bonds borrowed has increased. Italy has also kept up a high rate of inflation, with May's reading being 7.3%, June's reading being 8.5%, and July's reading being 8.4%.

Market speculators appear to predict Rome will default and that the financial shock would spread like a contagion throughout Europe based on the $37 billion in short positions. Italy's economy has a reputation for being robust, yet it is dependent on Russian gas. The International Monetary Fund (IMF) issued a warning last month that the Ukraine-Russia war-related tensions in Europe will cause Italy's GDP to decline by 5%. India has overtaken the United Kingdom as the fifth-largest economy in the world, which coincides with the economic collapse in Italy.

According to reports, Mario Draghi, the prime minister of Italy, has not done enough "to kick-start growth." Italy is struggling and pays the second-highest premium behind Greece to borrow bonds, despite Draghi's promise to save the euro in July 2012. "Draghi is trying, has made a few small adjustments here and there, but neither I nor the market is yet confident that trend growth in Italy is strong enough," said Holger Schmieding, an economist at Berenberg.


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