Great volatility, skyrocketing public debt, debt-to-GDP ratio at unprecedented levels, and the current economic climate bringing with it hyperinflation are behind hedge funds’ bet on Italy’s default.
Why markets are predicting a default for Italy
Italy carries a public debt close to trillions of euro. The debt itself, while huge, does not pose a threat, but it becomes one if it lacks the prerequisites to be repaid. In this regard, the figure that indicates peace of mind or otherwise with respect to this is the debt/GDP ratio, or a country’s ability to be solvent.
In Italy, the debt-to-GDP ratio is well over 150%, and this does not help the markets to look at the situation in a rosy way, and above all it does not help them to look at it in a detached way because the opportunity is too great not to see a short bet on it.
The objective difficulties for the state to meet its payments has been aggravated by the crisis between Ukraine and Russia, which, among other things, in addition to leading to a general increase in the prices of all commodities and energy, has resulted in Moscow’s blocking of gas supplies to Italy.
The situation is serious to the point that there is talk of rationing that should have already taken place normally in a forward-looking country and has yet to begin, and above all of a winter of restrictions with the people being called upon to make sacrifices such as lowering heating temperatures from one to two degrees, sky-high bills and inflation eroding already tax-burdened salaries.
Italy’s dire situation shines through clearly in S&P Market Intelligence data showing that Italian bonds borrowed as of 23 August totaled 37.20 billion euros, which is the highest since January 2008, namely the Great Recession.
Inflation and Italy’s future
Italy continued to have high inflation rates, with May registering 7.3%, June registering 8.5%, and July essentially breaking even with the previous month. However, there has been one positive international note: Mario Draghi.
The former President of the European Central Bank and former Governor of the Bank of Italy, as Prime Minister has done his best to put the country’s accounts in order, and his work has been appreciated internationally enough to cause hesitation among serial bettors who were predicting an Italy with Argentinian tones few months from now.
“Draghi is trying, he has done a little here and there but neither I nor the market are still convinced that the growth of the trend in Italy is strong enough.”
This is the point made by well-known Berenberg economist Holger Schmieding.
According to the International Monetary Fund (IMF), the Italian economy will face a 5% contraction in its economy as a result of tensions in Europe caused by the war between Russia and Ukraine.
As an unprecedented recession unfolds in Europe and more severely in Italy, India is surpassing the United Kingdom economically and taking fifth place as the world’s largest market and volume.