Anxious Meloni? ... Hedge Fund Short Selling of Italian Government Bonds Hits Post-Financial Crisis High

Giorgia Meloni, leader of Brothers of Italy (FdI)
Photo by AFP Yonhap News

[Asia Economy Reporter Park Byung-hee] As political and economic uncertainties spread in Italy one month before the general election, a large-scale sell-off of Italian government bonds has been confirmed.

Major foreign media reported on the 25th (local time) that the volume of hedge fund sales betting on the decline in Italian government bond prices has increased to the largest level since the 2008 global financial crisis. According to S&P Global Market Intelligence, the current short-selling volume of Italian government bonds exceeds 39 billion euros (approximately 51.875 trillion KRW), marking the highest level since January 2008.

Accordingly, bond yields, which move inversely to prices, have recently shown a sharp rise. The yield on the Italian 10-year government bond was 2.98% on the 15th but surged sharply to 3.67% on the 24th. The yield spread with German government bonds, recognized as the safest asset in Europe, widened from 1.37 percentage points at the beginning of this year to 2.3 percentage points recently.

Since the outbreak of the Ukraine war reduced Russian gas supplies, Italian government bonds have continued to weaken this year. Italy is one of Europe's major importers of Russian gas, relying on Russia for 43% of its gas consumption. The International Monetary Fund (IMF) warned last month that if Russian gas imports were cut off, the Italian economy could shrink by more than 5%.

Recently, political uncertainty has increased ahead of the September 25 general election, causing Italian government bonds to weaken. This is because Giorgia Meloni, leader of the right-wing coalition Brothers of Italy (FdI), who has pledged to expand public spending and implement significant tax cuts, is highly likely to become the next prime minister. According to current polls, Meloni is likely to become Italy's first female prime minister, and the right-wing coalition is expected to secure a majority in both the upper and lower houses.

Meloni has supported Italy's withdrawal from the European Union (EU), raising concerns that her extreme right-wing policies could deepen Italy's division after taking power. Outgoing Prime Minister Mario Draghi advised the next government at a Catholic event held on the 24th in Rimini, located on the northeastern coast of Italy, saying, "Italy must remain at the center of the EU and must not choose the path of isolation."

Italy is also expected to suffer significant damage from the European Central Bank's (ECB) interest rate hikes and the end of quantitative easing. This is because Italy has the second-highest government debt ratio among the Eurozone (19 countries using the euro), following Greece. Currently, the Italian government's debt amounts to 2.3 trillion euros.

This content was produced with the assistance of AI translation services.