FTSE follows euro south after Germans ban naked short-selling

If the Germans are keen to prop up confidence in the euro, they've got a funny way of showing it.

by
Last Updated: 31 Aug 2010

Germany's latest effort to stabilise their financial markets hasn't quite had the desired effect: its unilateral decision to ban naked short-selling of government bonds and shares in its top ten financial institutions has hammered the euro and sent equity markets plunging around the world. The Germans' theory seems to be that this move will reduce volatility. But since nothing much will actually change unless everyone else follows suit, all it's done is undermine confidence in the eurozone's collective ability to get out of the current mess. Hence why traders are selling the euro this morning (albeit not to buy the pound...)

Last night Germany's financial regulator Bafin surprised the markets by announcing an immediate ban on naked short-selling - where traders short stocks they don't actually own – of both banking shares (as other countries have done before) and euro-denominated government bonds. It’s also banned the purchase of credit default swaps on eurozone bonds (effectively insurance policies against the borrower defaulting). The theory is that all this will make prices less volatile.

Now you probably thought the Germans were a lot more relaxed about all things naked than us uptight Brits. But after reluctantly forking out for the Greek bailout, the last thing they want is their hard-earned disappearing into the deep pockets of all those nasty hedge funds, who are currently betting that the eurozone’s well-attested problems are likely to get worse. Then again, since Chancellor Merkel told the German parliament today that ‘the euro is in danger' and that the current situation is 'the greatest challenge that Europe has faced for decades', it's not exactly an unreasonable point of view, is it?

There are other problems with this brilliant plan. For a start, Germany's currently flying solo on this one - it only applies to German participants in Germany. So traders will still be able to short the bonds via other European markets. It will presumably also make it much harder for the Germans to sell their debt, since it makes their bond market much less liquid. And of course, with Germany off doing its own thing, it doesn't exactly fill investors with confidence that the eurozone can work together to solve its current problems.

So all in all, it's no wonder the euro is down to another four-year low against the dollar this morning - or that share prices have fallen as markets worry about the fall-out (every single stock on the FTSE is down this morning). You might think it would also mean the pound looks relatively attractive to investors - but in fact, sterling is down slightly against the euro this morning. To be fair, it's well up over the course of this week - but it might also suggest that investors are worried that we're not much better off here in the UK...


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