MILAN - Short-selling bans will prove an ineffective cure to a coronavirus-induced market rout. Thursday’s hair-raising stock market plunge prompted Spain and Italy to curb trading on dozens of hard-hit local stocks, including Fiat Chrysler Automobiles and Telefonica. The measures, however, look rushed and futile.

The prohibition affecting 85 Italian and 69 Spanish stocks only lasts throughout Friday. But it highlights stock market regulators’ concern following the worst daily closure on record for both bourses. In Italy, Europe’s hardest-hit country by the pandemic, the blue-chip FTSE MIB index lost nearly 17%. An extension of the ban could raise alarm bells among investors.

Short-selling restrictions have been used in previous emergencies. During the global financial crisis, in particular, trading curbs were enforced to shield banks from a confidence shock that could have hurt their liquidity. Also, European Union rules allow such prohibitions for large stocks when the loss surpasses 10% in a day, or 20% for smaller companies. That was the case for the Italian and Spanish shares covered by the ban.

Markets rallied both in Milan and Madrid on Friday. But this is probably linked to a recovery in oil prices and policymakers’ moves to fight the coronavirus, rather than to the trading curbs. Crucially, traders told Breakingviews that this week’s exceptional losses were chiefly driven by investors closing positions in anticipation of economic carnage from widespread lockdowns, not speculation. If panic selling kicks in again, the bans won’t help much.

CONTEXT NEWS

- Italy’s market regulator Consob said on March 12 it would ban short-selling for the entire March 13 trading session on 85 listed stocks including automaker Fiat Chrysler Automobiles, top lenders Intesa Sanpaolo and UniCredit, and oil major Eni.

- The decision follows a 16.9% daily loss for the main FTSE MIB index on March 12, the worst daily performance ever, as panic about a spiralling coronavirus outbreak roiled global financial markets.

- The Spanish regulator said it would impose a similar ban on 69 stocks.

- The ban is enforced on liquid listed companies that closed down more than 10% on March 12. For less liquid companies, that threshold was 20%.

(Editing by Liam Proud and Oliver Taslic)

© Reuters News 2020