Short-sellers target Portugal as Espirito Santo woes spread

Wed Jul 16, 2014 9:58am EDT

* Bearish bets rise as Espirito Santo scandal escalates

* Sign of more discerning tactics by investors

* Portugal Telecom most shorted stock on PSI 20 index

* Buying on dips in price may hurt short sellers

By Francesco Canepa

LONDON, July 16 (Reuters) - Short sellers are raising their bets that Portuguese stocks will fall as the escalating troubles of the Espirito Santo family send ripple effects through the country's corporate world.

The moves are a sign investors are using more discerning tactics, after a two-year rally for the euro area's periphery that has left stocks and bonds looking expensive.

Portugal's largest telecom group, Portugal Telecom, has become the most shorted stock on the Lisbon benchmark PSI 20 index, according to data-provider Markit. The group plans legal action to recover more than $1 billion owed it by the Espirito Santo family's holding company, Rioforte.

Short sellers borrow a stock they think is overvalued and sell it, betting they will be able to buy it back at a lower price before returning it to the lender. The Markit data cited the amount of shares out on loan at the end of Tuesday.

However, such bets may end up backfiring: Portuguese shares rebounded on Wednesday, underscoring some investors' willingness to buy into periphery trades on price weakness. A rising or even steady price would leave short-sellers with burnt fingers.

Around 84 percent of the Portugal Telecom shares that are available to be borrowed - equivalent to 12 percent of the company's total share capital - are out on loan, according to Markit, up 6.3 percentage points over the past week.

For the PSI 20 as a whole, around 13 percent of all shares available for lending are out on loan, up 2 percentage points from last week. That compares with around 3 percent of British blue chips and 4 percent of Italian stocks.

The PSI 20 was up 2.9 percent on Wednesday but has fallen 7 percent since the end of June. But some investors have been willing to buy into the euro area's periphery when prices fall.

Other stocks that have seen increased activity by short sellers are Banco Espirito Santo, the bank at the heart of market jitters over the past week, which is linked to Espirito Santo family shareholders, and rival Banco Comercial Portugues, at 76 and 48 percent respectively. (Reporting By Francesco Canepa; Editing by Larry King)

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