The recent collapse of Italian insurer Eurovita has raised concerns about the impact of rising interest rates on financial institutions around the world.
Like Silicon Valley Bank (SVB), which was forced to raise billions of dollars in emergency funding earlier this year, Eurovita had a large exposure to long-dated government bonds. As interest rates have risen, the value of these bonds has fallen, leaving Eurovita with significant losses.
In addition, Eurovita's liabilities were less sticky than assumed. This means that when the company's financial problems became known, policyholders rushed to redeem their policies, putting further pressure on the company's finances.
The Italian government and regulators have stepped in to prevent Eurovita from collapsing, but the rescue deal has come at a cost. Banks that sold Eurovita's products have been forced to provide financing of 6 billion euros to guarantee the remaining policies.
The Eurovita crisis is a reminder of the risks that rising interest rates pose to financial institutions. It is also a sign that the global economy is becoming increasingly interconnected. As a result, problems in one country can quickly spread to others.
Update
As of July 4, 2023, the Italian government has announced that it will be taking a 70% stake in Eurovita. This move is designed to stabilize the company and prevent it from collapsing. The government has also said that it will be working to find a buyer for Eurovita in the near future.
The Eurovita crisis has raised concerns about the health of the Italian financial system. The country is already struggling with a high debt burden, and the collapse of Eurovita could have a knock-on effect on other financial institutions.
The government is hoping that the rescue deal will prevent a wider crisis, but it is too early to say what the long-term impact of the Eurovita collapse will be.
