Germany’s market regulator announced a ban Tuesday on so-called naked short-selling of eurozone government debt and shares of major financial companies, a move that came as European officials seek to strengthen control of markets.
The regulator, BaFin, said the ban — which was to take effect at midnight Tuesday and run through March 31 of next year — also would apply to naked credit default swaps involving eurozone debt. The move, it said, was aimed at upholding financial stability amid the continent’s persistent debt crisis.
Still, the ban itself appeared to underline markets’ concerns about European policymaking, and the euro fell Tuesday evening. It bought around $1.22, after trading well above $1.23 earlier in the day.
Naked short-selling involves a trader selling shares or investments he doesn’t own. Credit default swaps are a type of insurance against a borrower going bankrupt that have become a lucrative market for traders.
European leaders have complained that speculators used credit default swaps on Greek government debt to bet the country would default on its borrowings — raising pressure to the point where it was forced to ask for a bailout.
The German ban on naked short-selling of financial companies’ shares applies to several banks — Aareal Bank AG, Commerzbank AG, Deutsche Bank AG and Deutsche Postbank AG.
It also covers insurer Allianz SE; reinsurers Hannover Re AG and Munich Re AG; Generali Deutschland Holding AG, MLP AG, and Frankfurt stock exchange operator Deutsche Boerse AG.
Angela Merkel sets up the most strange regulatory plan in the history of capital markets.
To put it in simple terms: CDS is a powerful tool big finance players use to reveal the weakness of badly managed States-and profit from the operation. So banning CDS breaks the thermometer but doesn’t cure the fever. It also empties the patient’s pocket.
Europe is about to isolate itself from capital markets entirely. If it is Merkel’s goal, congrats to her! The problem is that this plan appears to be half-baked and not really thought out, and plays into market doubts about European policymaking credibility. During the financial crisis in 2008, there was a ban on short-sales for about three weeks and it was very counterproductive. It didn’t help stabilize asset prices at all. I see huge seismic market turbulence ahead.
European governments are trying to block the signal that says loudly and clearly that they are doomed. This will just suck a stonger vacuum under the overvalued securities they are trying to protect.
We live in interesting times. Go gold.