We just got another major sign that Italy’s financial system is extremely fragile.
Consob, Italy’s Securities and Exchange Commission, has banned the short selling of shares in stricken Italian bank Monte dei Paschi di Siena for at least three months from Thursday morning, in the latest sign that Italy’s banking system is teetering on the brink of a major disaster.
In a statement released on Wednesday afternoon, the regulator says that no short selling — essentially placing bets on the price of a stock falling — will be allowed on the shares of the world’s oldest existing bank until October 5.
The ban follows on from an initial one-day short selling ban, put in place earlier in the week after Monte dei Paschi shares dropped around 20% in a single day.
In a sign of just how bad things are for Monte dei Paschi, and the wider Italian markets, Britain’s Financial Conduct Authority has also joined in on the ban, saying that “it is necessary to take the action set out in this notice to assist Consob.” Further bans have been put in place on Credito Valtellinese, a small sized co-op lender, and Telecoms Italia, by both Consob and the FCA.
Shares in the bank have now fallen more than 99% since the 2008 financial crisis, dropping from more than €0.90 to less than €0.003 now. Here is the brutal chart from Bank of America Merril Lynch (BAML) showing Monte dei Paschi’s pain:
And here is the key extract from Consob’s statement:
“The ban will be enforce for the next three months, from tomorrow 7 July 2016 (start of day) until 5 October 2016 (end of day).
“The prohibition on net short positions strengthens and extends the ban to short selling adopted yesterday, as the new prohibition bans both short selling on Banca Monte dei Paschi di Siena (BMPS) shares and short positions taken though single stock derivatives on BMPS shares.
“The ban applies to all transactions, irrespective of where they have been carried out (on an Italian or foreign trading venue or over-the-counter) and it affects market makers as well.”
Pensioners line up outside an Alpha Bank branch in Athens, Greece, July 1, 2015.
The rarity of short selling bans
Bans on short selling are a pretty rare occurrence in the markets.
The last notable examples of bank shares being subject to prohibitions came in Greece during 2015 when the country’s financial system came close to collapse, which would have dragged Greece out of the euro and subsequently decimate the European Union.
In 2015, short selling on the shares of several Greek banks was banned just before they were recapitalised by the Greek government in a bid to stave off collapse.
Monte dei Paschi’s fall from grace has come as a result of fears around Italy’s banking sector caused by huge numbers of non-performing loans (NPLs) held by banks. Monte dei Paschi for example, is in possession of a bad loan book of around €47 billion (£39.9 billion) right now, compared to a market capitalisation of roughly €1 billion.
The situation is being made worse by a hugely uncertain political landscape in the country. Italians will have a say on reforms to its Senate, the upper house of parliament, in October. The proposed reforms are widespread, and if approved could improve the stability of Italy’s political set up and allow Prime Minister Matteo Renzi to push through laws aimed at improving the country’s economic competitiveness.
If denied, Renzi’s government will most likely fall, plunging Italy back into the type of political chaos last seen after the ousting of former Prime Minister Silvio Berlusconi, according to Deutsche Bank. That, Citi says, makes the referendum “probably the single biggest risk on the European political landscape this year among non-UK issues.”