Germany Issues Unilateral Ban on Short Selling


"If investors' fears are realized, Eurozone growth is likely to be depressed for years."

As the German government banned the naked short selling of EU government debt and the stocks of 10 leading German Banks, the markets reacted with a mixture of disbelief and anger as billions were wiped of the value of shares across the main European bourses. What does this have to do with the U.S. and why should it bother us what the Europeans do to hamstring their financial services sector?

Financial markets more than any other are a global business nowadays, if for no other reason than actions taken in one impact exchange rates and growth prospects that have a direct impact on fortunes in the U.S.

There could be some comfort taken if the action by the German financial regulator BaFin was necessary but some see it as a sop to beleaguered Angela Merkelís party facing wavering support on the left. The kindest conclusion is that Germany was simply trying to cynically manipulate the bond market ahead of a large sale.

The sense among EU members that Germany had acted solely in its own interests was compounded as an auction of £3.7bn of German government bonds within hours of BaFin's announcement 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 its own debt sale, many EU governments will have found it hard to escape the conclusion the German ban was partly a cynical attempt to improve Germany's finances.

If investors' fears are realized, growth in the Eurozone is likely to be further depressed for years. There is even the chance of a double dip as interbank lending dries up and businesses are once again starved of capital as in 2008/09. So distant and peripheral as Europe's banking problems may seem, we all have an interest in seeing them sort out not just their financial problems but the political issues that caused them.

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