Germany’s short-selling ban misses the point

May 18, 2010

Germany’s short-selling ban misses the point. The country’s plan to stop naked shorting of some financial stocks and European government bonds — as well as related credit default swaps — may score political points. But it sows confusion, and will hardly help tackle the causes of Europe’s financial woes.

The German ban appears to apply to three types of securities: shares of the country’s 10 largest financial institutions, European government bonds, and European sovereign CDS. The first is fairly harmless, the second seemingly pointless, and the third downright confusing.

It is not uncommon for regulators to ban naked shorting of stocks. U.S. investors, for example, have long been prevented from selling shares short unless they have agreed to borrow an equivalent amount of stock. In this respect, the German plan is not such a big deal. The only question is why it does not apply to the entire stock market.

The decision to target European government bonds is more surprising. Euro zone politicians have taken to blaming speculators betting on sovereign defaults for the financial crisis. But short-selling of government bonds isn’t widespread. While investors can take naked short positions through the repo market, this tends to be expensive.

Even trading in more liquid sovereign CDS instruments — where investors buy protection against a euro zone country defaulting on its debt — hardly suggests a speculative frenzy. In the week ending May 7, net outstanding CDS on Greek debt totalled $7.7 billion, according to the Depository Trust and Clearing Corporation. A year earlier, the figure was $7.8 billion.

The naked CDS ban is also hard to enforce, even in the markets under Germany’s control. Regulators will somehow have to distinguish between investors who are buying CDS protection as a hedge from those placing a naked bet. And the ban will not prevent speculators from trading CDS of other entities, like banks, that would suffer in the event of a sovereign default.

It is also hard to see what Germany can do on its own. Unless other European countries follow its lead, there will be little to stop investors from shorting euro zone sovereign debt elsewhere. News of the ban has caused confusion in financial markets. It seems unlikely to achieve much else.

7 comments

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In desperate times, desperate people do desperate things.
Simple as that. It’s a situation where you should shut up when you have nothing intelligent to say.

Posted by doctorjay317 | Report as abusive

Precisely. I would add that Chancellor Merkel is in a rather delicate position politically after her recent by-election losses, thus she may be looking to deflect attention from that and give the appearance, however fleeting, of being on top of this issue. A sorry sight indeed, these Euro-pols pointing fingers in all direction but at themselves.

Posted by Gotthardbahn | Report as abusive

Actually — Germany GETS the point. The rest of the world better get the point too — real soon — or economic chaos will follow again as sure as night follows day. Remember the S&L chaos not that many years back? How many times does this have to happen before we join Germany in declaring “enough is enough”.

Posted by JJWest | Report as abusive

Germany’s actions suggest that the government has a complete lack of understanding of markets. This is consistent with Germany’s long-standing position that the possibility of inflation is that only parameter of its currency that matters. Everybody knows about the German hyperinflation of the 1920s, and everybody agrees that there should be any tolerance of government incompetence of that sort. But to say that inflation is the only currency parameter that matters is to set up a situation where sometimes the cure will be worse than the disease.

Posted by Bob9999 | Report as abusive

Europe has a common currency, the euro, created by the European Central Bank, which is controlled by the monopoly banks in Europe, but the central government, the European Union, does not have the power to tax or control budgetary spending of the free, sovereign, independent States in this voluntary Union.

These monopoly banks, using their European Central Bank, created this current financial crisis to change the European Union into a compulsory union of colonies under their centralist government with the power to collect taxes from the citizens and dictate budgetary spending by each State (colony).

The major cut in spending will be the replacing of each State’s separate military power with a central European army, allowing taxes to be collected without so much resistance, which will balance the budgets of these colonies.

The collection of taxes will strengthen the euro and the centralist government, while greatly reducing the power of each State and move the world one more major step toward a one world currency, controlled by the monopoly banks.

Since central banks create money out of thin air with digital computer entries, a digital one world money system should logically follow with implanted computer chips for the citizens, which will end all the identity theft.

Posted by jebahoula | Report as abusive

Soooo, if this new rule is practically meaningless as you say, why did the markets fall on its announcement? Unless the market is meaningless also…..

Posted by edgyinchina | Report as abusive

Naked short selling is fraud, and has the same effect as counterfeiting, or, as the Libertarians like to say, printing money. Naked shorting “creates” shares that don’t even exist, and dumps them into the market, diluting the value of the legitimate shares in circulation.

It does not make sense for the markets to sell off on the news that governments are taking steps to limit the damage done by the fraudster naked short sellers. Either the market makers are sending a message, “Don’t mess with our ability to screw investors” or, they see the writing on the wall and are cashing out until more cooperative government leaders can be bought.

Posted by GetpIaning | Report as abusive

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