The controversial practise of short selling has been banned in France, Italy, Spain and Belgium, in an effort to ease the downward pressure on bank share prices there. Meanwhile the latest numbers from Eurostat show that the French economy stagnated in the second quarter, with zero growth between April and June.
Markets reacted badly to the data - modest growth of around 0.3% had been expected - the CAC 40 living up (down?) to its name and falling nearly 2% this morning. The breezy disdain of the Gallic consumer has finally been punctured by the gravity of the Eurozone debt crisis, and household spending has plummeted.
But what of the short-selling ban, imposed initially for a period of 15 days? Many of you will recall that a similar measure was adopted here (and in the US) at the height of the last banking crisis - and that our friends across the channel could hardly contain their ‘I told you so’s’ at the time. But we cannot allow more than the briefest moment to enjoy their discomfiture this time around, for such is the interconnectedness of the modern banking system that any troubles on the continent will find their way over here soon enough.
Shorting - and the banning or otherwise thereof - remains a pretty controversial subject. Objectors suggest that not only is it purely speculative but also that it is dishonest, because traders sell shares which they don’t actually own. For those who need their memories jogging, at its simplest short selling involves borrowing shares in a company whose price you expect to fall and selling them, in the expectation that you will be able to buy them back later at a lower price and pocket the difference. Shares are usually borrowed from brokers who charge a commission for the loan.
In terms of pure market theory, there is nothing wrong with short-selling, at least while the proportion of the total trading volumes of a particular share that are being shorted remain modest. But there are plenty of reasons why regulators and company managers do not like it - not least because in a febrile market shorting is often blamed for a very rapid downward spiral in share price, which can happen far too quickly for managers to stand much of a chance of doing anything about it.
Apart from it’s not being quite cricket, will the ban have the desired effect? It does seem to have reduced the pressure on bank shares in the Eurozone a little so far, but the evidence in the longer term is not all that encouraging. The results of the 2008 ban in the UK and US seem to suggest that it didn’t reduce volatility, and may even have done more harm than good. The chairman of the US Securities and Exchange Commission at the time, Christopher Cox, has since said of the decision to impose a ban ‘Knowing what we know now, I believe on balance that the Commission would not do it again.’
But if the ban is economically questionable, it’s politically expedient in that it makes it look like something is being done. And it also looks pretty victim-free form the man or woman in the street’s point of view - the only people who suffer being a few speculative traders and hedge funds, and who is going to shed any tears over them?
- Image credit: Flickr/rockcohen