Hedge funds banned from shorting Italian firms as may cripple economy

Hedge funds have been banned by regulators from short-selling three struggling Italian firms - Monte dei Paschi, Credito Valtellinese and Telecom Italia - due to concerns it could detonate Italy's £300bn bad debt time bomb. This shows that traders are betting heavily that the nation's financial system could collapse, revealing further the chronic state of the Italy.

Hedge funds have been banned from short-selling three Italian companies as they circle its crippled economy.

The practice – which sees traders bet a share price will fall – was forbidden by the City watchdog for lender Credito Valtellinese and communications firm Telecom Italia during yesterday’s trading.

And shorting of financier Banca Monte dei Paschi di Siena was also stopped throughout Wednesday’s trading session.

No deal: Hedge funds have been banned from short-selling three Italian companies

The bans were introduced by the Financial Conduct Authority in response to requests from European Union regulators.

Heavily shorted stocks can be more volatile and make it more likely a manageable dip in price could become a disorderly panic.

The watchdog’s actions suggest traders are betting heavily that Italy’s financial system could be close to collapse.

It has been at risk since the eurozone crisis first burst out into the open seven years ago and is now sitting on a £300billion bad-debt time bomb.

The problem has continued to fester while attention was focused on other more pressing concerns such as the Greek economic crisis. Before the Brexit referendum, which is seen as the latest trigger for Italy’s woes, the FCA had only banned shorting eight times in 2016.

Three of these edicts were linked to stocks in Portugal, where problems are similar but less pronounced. The other five related to Italian banks – three to Monte dei Paschi alone.

Finance shares across the Continent have taken a battering since the Brexit vote a fortnight ago, with the eurozone’s 30 largest banks since shedding £65.6billion.

Deutsche Bank, the Continent’s biggest lender, has seen its shares sink to record lows. It failed a US Federal Reserve stress test last month because of ‘broad and substantial weaknesses’ in capital planning.

However, few believe Deutsche is close to breaking point.

Italian lenders are seen as far more risky and their shares have been among the hardest hit as traders rush for the exit.