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The IUP Journal of Financial Risk Management
The Use of OTC Derivatives by Italian Regions: For Hedging or Trading Purposes?
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This paper discusses how the poor economic performance and the European fiscal constraints contributed to reducing the resources that the central state transfers to local administrations in Italy. The study also highlights how the Italian Ordinary Statute Regionsí (OSRs) debt has just been doubled to the tune of 57 tn between 2007 and 2014. Further, the study delineates how these regions have full legislative power over their debt and debt-related instruments and have extensively used OTC contracts to manage their growing liabilities with least regulation and control. Against this backdrop, the paper investigates whether OTC derivatives underwritten by these regions have been used as hedging tools to manage their debt exposure or just have been used as mere trading tools. However, the findings of the study confirm that most of the Italian OSRs have hedged their debt exposure with OTC derivative contracts.

 
 
 

Due to the economic crisis, the macroeconomic performance of Italy was very poor during 2007-2014. This caused an increase in public expenditure and debt, both at the central and local levels (Table 1). The poor economic performance and the European fiscal constraints contributed to the reduction of the resources that the central state transfers to local administrations. Regardless of the economic crisis, during the period under consideration, regions increased taxes to fund the (increasing) expenditures, especially in the healthcare system. The total debt of regions doubled between 2007 and 2014, and Ordinary Statute Regions (OSRs) extensively employed Over-the-Counter (OTC) swaps to manage their (increasing) liabilities. According to the Bank of Italy (2016) the negative market value of OTC contracts from 2007 to 2014 registered a significant increase, from € 803 mn to € 1,328 mn. Over the same period, the notional amount of OTC contracts dropped (only) from 15 bn to 12 bn. In this negative economic context, the present paper, based on the available accounting data, investigates whether OTC derivatives underwritten by regions have been used to hedge their (increasing) debts or to counter-balance the reduced resources from the central government.

 
 
 

Financial Risk Management Journal, OTC Derivatives, Hedging or Trading