Italy Moves to Curb Short Selling After Contagion Concerns Slam Markets

Photographer: Guiseppe Aresu/Bloomberg

UniCredit, Italy’s largest bank, plunged 7.9 percent. Close

UniCredit, Italy’s largest bank, plunged 7.9 percent.

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Photographer: Guiseppe Aresu/Bloomberg

UniCredit, Italy’s largest bank, plunged 7.9 percent.

Italy’s market regulator moved to curb short selling after the country’s benchmark stock index fell the most in almost five months and bonds tumbled on investor concern the nation may be the next crisis victim.

Consob ordered yesterday that short sellers must reveal their positions when they reach 0.2 percent or more of a company’s capital and then make new filings for each additional 0.1 percent. The measure takes effect today and runs through Sept. 9. The FTSE Italia All-Share Financials Index fell 0.8 percent as of 9:50 a.m. to the lowest in at least two years.

Europe’s finance ministers are meeting in Brussels today to seek ways to shore up Greece and defend the region’s other heavily indebted nations. The premium investors demand to hold Italy’s debt over German bunds hit a euro-era high of 267 basis points today.

“Italy cannot afford to pay the interest rates it’s paying right now,” Andrew Bosomworth, a fund manager at Pacific Investment Management Co., said in an interview on Bloomberg Television today. “Its debt is unsustainable if we project into the future these sorts of interest rates levels, so we do need something to change -- be that a policy response, be that a change in attitudes in the markets.”

Slow Growth

Standard & Poor’s and Moody’s Investors Service said in the past two months that they may cut the country’s credit rating because slow economic growth will make it tough to curb debt.

Consob’s commissioners held an emergency meeting yesterday after the country’s benchmark FTSE MIB Index (FTSEMIB) plunged 3.5 percent on July 8, led by a decline in UniCredit SpA (UCG) and other shares of banks, which are the among the largest holders of Italy’s debt. The regulator’s ruling follows similar action taken in other European countries, including Germany, Rome-based Consob said.

UniCredit, the country’s largest bank, today fell as much as 3.7 percent before reversing the loss to a 0.9 percent gain as of 9:55 a.m. Intesa Sanpaolo SpA (ISP), the second-biggest lender, dropped 1.9 percent. Both hit lows not seen since the period when markets were emerging from the crisis spawned by the collapse of Lehman Brothers Holdings Inc.

“Were Italy to undergo a sovereign and debt downgrade, earnings in the banking sector could be more heavily impacted than the market is currently discounting,” HSBC Holdings Plc analysts including Carlo Digrandi wrote in a note today.

Blaming ‘Speculators’

Italian politicians including Paolo Bonaiuti, an aide to Prime Minister Silvio Berlusconi, blamed the market slide on “speculators” and pledged action to rein in investors perceived to be attacking Italy. Bonaiuti said Italy would be united “in blocking the effort of speculators.”

On July 5, European lawmakers voted in favor of a ban on short selling of government bonds in the EU unless traders have at least “located and reserved” in advance the securities they intend to sell. The European Union Parliament also called for restrictions on traders’ use of credit-default swaps to profit from defaults on sovereign debt they don’t own.

Short selling involves the sale of securities borrowed from the owner, and generates profit when the trader repurchases them at a lower price and returns them to the owner. The amount of shorting is limited by the willingness of owners to lend.

Merkel, Sarkozy

The European Securities and Markets Authority, which co- ordinates the work of national regulators in the 27-nation EU, should be given emergency powers to temporarily ban short selling or trades in CDS on sovereign debt in the EU, the Parliament said.

Politicians including German Chancellor Angela Merkel and French President Nicolas Sarkozy have claimed that naked short- selling and credit-default swaps worsened the euro area’s sovereign-debt crisis, and have called for EU curbs.

Michel Barnier, the EU’s financial-services chief, said last year such trades may lead to “disorderly markets and systemic risks.” Finance ministers from the 27-nation region agreed in May that traders should be allowed to short sell government bonds and stocks if they have a “reasonable expectation” that they can obtain the underlying securities. They also rejected calls from Germany for a ban on sovereign CDS.

To contact the reporter on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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