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| Europe | |
| Markets crash as German short-selling ban bites | |
| 2010-05-20 | |
| Amid scenes reminiscent of the financial crisis of 2008, markets reacted with a mixture of disbelief and anger to a German government ban on short selling of European Union government debt and banks. Billions of pounds were wiped off the value of shares as the main European indices on Wednesday dropped on the back of large-scale selling by institutions shocked and spooked by Germany's actions.
Merkel Stefan Isaacs, at fund manager M&G summed up the mood for many, describing the midnight ban by BaFin, the German regulator, as "draconian and uncoordianted". "The fact that the ban was announced after the European market closed and was implemented only a few hours later is nothing short of reckless and has the market speculating about larger, unknown problems." The grim mood was matched in currency and fixed income markets, with the euro hitting a four-year low against the dollar of $1.2144 in Asian trading, before rallying to $1.24 on rumours that the Swiss National Bank or European Central Bank had entered the market. Even experienced bond traders were left uncertain how to react and several major investment banks opted to delay opening their market making desks until some sort of order returned. "Nobody has a clue what is going to happen next," said Anthony Peters, a strategist at Swissinvest. "Politicians have shown they have no understanding of markets. They are firing the wrong calibre gun, at the wrong target and they are missing." With echoes of the summer of 2007 when the credit crunch first began and September 2008 in the aftermath of Lehman Brothers collapse, the inter-bank lending markets have again showed signs of strain as financial institutions became increasingly weary about lending to one another. One London-based credit trader said only top-rated financial institutions were comfortably accessing the overnight borrowing markets, as banks again worried about the exposure of their rivals to bad debts, in this case Greek bonds. The overwhelming sense of confusion was compounded by the reaction of other European governments to the German ban, as complaints were voiced about a lack of consultation ahead of the surprise announcement. Christine Lagarde, French finance minister, said France would not be following Germany's lead, and issued a thinly veiled attack at the country's unilateral approach. "I think we should really request the views of those governments affected by this measure," said Ms Lagarde. Michel Barnier, the EU's internal market commissioner, made his own coded attack on "these measures", saying they would have been more effective if they had been coordinated at the "European level". "It is important that member states act together and we design a European regime to avoid regulatory arbitrage and fragmentation both within the EU and globally," said Mr Barnier. The sense among EU members that Germany had acted solely in its own interests was compounded yesterday as an auction of £3.7bn of German government bonds saw the country issue new debt at the cheapest rate since 1998, helped largely by the so-called "short squeeze" created in the bond market by the short selling ban, which forced many investors with short positions to buy debt. Coming a day after Spain struggled with a debt sale of its own, many EU governments will have found it hard to escape the conclusion the German ban was a partly a cynical attempt to improve Germany's finances. Questions have also been raised about how effective the ban would actually be. Much of the trading in German bonds and shares does not actually take place within the country, therefore the ban will not have stopped many banks or hedge funds from continuing to short sell EU government debt or German banking stocks. | |
| Posted by:lotp |
| #7 Naked short selling is almost always a good thing. In particular, it limits manipulation of prices where shares or debt are held by a few. Governments particularly hate short selling because it hampers their attempts to manipulate prices of their debt, which is the case in Europe at the moment. BTW, people sell what they don't have all the time. Buy electronics online and chances are the seller doesn't actually have the item you buy. Anyone who does, then goes out and buys it in time to fulfill the contract, which is exactly what naked short sellers do. |
| Posted by: phil_b 2010-05-20 23:10 |
| #6 Naked shorts sell something they do not own and do not have. If they were to do this in other areas of the economy, they would be jailed for thievery. If they did this as an investment, it would be treated as a Ponzi scheme. |
| Posted by: No I am the other Beldar 2010-05-20 16:27 |
| #5 Speaking of messes....anyone having difficulty logging on to Yahoo besides me? |
| Posted by: Besoeker 2010-05-20 16:09 |
| #4 It is a ban on naked short selling of banks and financial instruments (can you say credit default swaps?). Naked shorts should be outlawed and those who do should be sent to prison because it allows vultures to short sell an infinite number of shares, eventually driving the share price to zero and the company bankrupt when they can't borrow or meet debt covenants because their stock price is too low. |
| Posted by: ed 2010-05-20 16:05 |
| #3 What a mess... |
| Posted by: Keeney 2010-05-20 15:34 |
| #2 Politicians have shown they have no understanding of markets. Given the collapse of the markets in 2008, I believe we can make the same statement about the people running and feeding the markets as well. Since they precipitated the large sucking of national treasuries to save their holdings, rather than allow them to perish off the books, it naturally invited equally incompetent people/politicians to participate in the process. |
| Posted by: Procopius2k 2010-05-20 09:59 |
| #1 "Nobody has a clue what is going to happen next," said Anthony Peters, a strategist at Swissinvest. IÂ’m no economic wheeler-dealer but introducing regulations that will assuredly add confusion and uncertainty at a time of unprecedented volatility smells of desperation. Apparently, that transparency thingy is only for the upper echelon of the Davos crowd. |
| Posted by: DepotGuy 2010-05-20 09:35 |