Right on the day when all eyes are on Greece, the International Monetary Fund expresses great perplexity about the Italian growth prospects.
In fact, the IMF considers Italy to be a country at high risk in the event of an increase in financing costs and in this context the different expectations on the country's fundamentals may affect the assessment of the sustainability of its debt.
Situation aggravated by the fact that, according to the findings of the IMF contained in the Global Financial Stability Report, since our country is in the position of a large debtor, it is more exposed to the risk of a lower demand from national banks and investors for its securities of state.
“Sovereign issuers with large elements of vulnerability are subject to sudden losses of investor confidence in the sustainability of their debts, in the event of a marked deterioration in fundamentals” writes the Fund, adding that rapidly changing expectations “can make bond markets typically more vulnerable liquids if market makers and investors shy away from risk when volatility rises.
The IMF also recalls that in the last year foreign banks have reduced their exposure to Italian and Spanish debt, although non-bank foreign investors still remain net buyers of Italian paper.
Therefore, according to the International Monetary Fund, Italy "is vulnerable to a contraction in demand from domestic banks and institutional investors who already have significantly higher exposure to domestic public debt than their counterparts in the euro area".
The July and August turmoil in Italian debt trading illustrates how excess volatility, if left unchecked, can potentially erode the investor base and lead to permanent debt repricing.
