August 16, 2022

Italy Moves to Rein In Short-Selling Amid Market Jitters

The step came as European Union officials met in Brussels to wrestle with threats to the currency union, even as wider discussions stalled over a second bailout for Greece.

Amid the continued uncertainty, the euro declined more than 1 percent against the dollar, to $1.4058, and the Euro Stoxx 50 index of euro zone blue chips was down around 2.4 percent in afternoon trading. Trading in Standard Poor’s 500 index futures suggested Wall Street stocks would decline at the opening bell.

Germany sought to soothe the latest jitters ahead of the talks in Brussels.

Angela Merkel, the German chancellor, said she spoke Sunday with Prime Minister Silvio Berlusconi about the Italian situation, The Associated Press reported from Berlin. Italy needs to send a “very important signal” by approving an austerity budget, Mrs. Merkel said, and she has “firm confidence” that the Italian government will do so. Mrs. Merkel also called on the European ministers to sort out the Greek aid “in very, very short order,” the AP reported.

Consob, the Italian market watchdog, took its step on short-selling after Milan banking shares fell heavily last week. Investors were unnerved in part by signs of a growing divide between Mr. Berlusconi and the finance minister, Giulio Tremonti, who has been praised for his handling of the economy during the financial crisis and for maintaining control of the budget deficit.

In a statement, Consob said the measures were similar to those already in force in Germany. Under the new rules, short sellers must show their hands when they have a net short position of 0.2 percent holding of a company’s capital. They also must notify the market each time they obtain 0.1 percent more.

In a short sale, an investor sells a borrowed security in the hope of repurchasing it later at a lower price, pocketing the difference as profit.

The FTSE Italia All-Share index has fallen about 7 percent this year. It was down more than 3 percent in afternoon trading.

The trading curbs were enacted as top European Union officials met in Brussels ahead of an afternoon meeting of finance ministers from the euro area, which is expected to focus on how to resolve Greece’s troubles.

A spokesman for Herman Van Rompuy, president of the European Council, denied that the morning meeting would cover the state of Italy’s finances, which many investors consider increasingly precarious. But another official, who requested anonymity because he was not authorized to speak publicly, said Italy would probably be on the agenda.

For Italy, the cost of debt financing rose last week, though it is still well below the levels faced by Greece. The spread between the yield on the Italian 10-year bond and the German equivalent widened on Friday to 2.36 percentage points, the most since the introduction of the euro.

Italy’s cost of borrowing for 10 years is now about 5.27 percent.

The euro zone has been shaken by the fiscal troubles of Greece, Portugal and Ireland, though their economies are relatively small. The Italian economy is more than twice the size of the combined economies of those three countries. If investors were to drive Italy’s borrowing costs to unsustainable levels, it could imperil the entire European monetary union.

Even without Italy, European officials have a big task in the coming days. They have reached an impasse of sorts on whether to include the private sector in a second Greek bailout, which is considered essential to controlling the crisis that has so far been limited to the smaller economies on the Continent.

Some officials now believe that any bailout plan involving a substantial but voluntary contribution from private investors in Greek debt would be declared a selective default by the bond rating agencies Moody’s, Standard Poor’s and Fitch. The officials’ objectives of achieving a private sector contribution that is voluntary and substantial — but which is not judged a selective default — may not be possible.

If voluntary steps would cause such an event, these officials say, then more radical options may as well be considered, including requiring banks and other private investors to take part.

Article source: http://feeds.nytimes.com/click.phdo?i=dd06b49b7471bf4b2e73638b8ee1eeee

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