What Will German Short Ban Mean for Investors?
CNBC EMEA Head of News
German Chancellor Angela Merkel said Wednesday that the “euro is in danger” and warned that if the “euro fails, Europe fails.”
That was the reasoning behind a German government decision to ban naked short selling of German bank stocks, euro-zone bonds and credit default swaps.
But the decision prompted further selling of the euro overnight and analysts said it will have little or no effect on investors’ ability to go short.
The ban comes in the wake of Germany’s decision to back a multi-billion euro rescue package for the euro zone bond market and offer support for Greece. Politically, Merkel is under immense pressure to find someone to blame for the debt crisis and—having forced austerity packages on Greece, Portugal and others—is now taking aim at the Anglo-Saxon speculators.
Merkel just turned off the financial lights in Europe, one trader told Reuters, as the market sold off the single-currency.
Austria told the Financial Times that it wants a discussion on a Europe-wide ban but there remain big question marks over whether such a policy can actually work.
Can it Work?
“The naked short ban will not stop people borrowing and selling stocks and has not stopped the shorts in other countries,” Julian Pittam, managing director of short watchers Data Explorers, told CNBC.
Investors could go out today, borrow stock in German banks and short them anyway, Pittam said.
France already has a ban in place on naked short selling, but has seen big losses this year at the likes of Credit Agricole.
“I am not sure how it can be enforced, details are lacking and it raises more questions than it answers,” one trader from a leading French trading floor told CNBC.
“There are lots of ways to short a stock and this will not stop most of them,” Nick Wakefield, chief investment officer at Orchard Wealth Management, agreed.
“The regulator certainly has chosen to send a message to the markets,” Kit Jukes, an independent economist who until recently ran the fixed income team at RBS, said. “But it somehow seems to miss the point. Not sure if it will address the bigger issue. Investors could react in two ways: take heed and do as they say, or simply vote with their feet.”
German Finance Minister Wolfgang Schaeuble will now push for a transaction tax at the G20 and called on euro-zone members to cut deficits now to help convince the market of the blocks financial health.
"We haven't really convinced the markets yet, as we have seen the euro falling further. That means we must reduce deficits,” Schaeuble told German radio.
Economists at Goldman Sachs in Germany said the move is a direct result of the recent rescue package for the European bond market.
“In our view, it is likely that this drastic move has been triggered by the planned passing by parliament of the German share of the €440 billion package on Friday,” in a research report. “We hear that there seems to be more resistance to the help package than previously thought.”
“So far, we have not heard of similar moves in other euro-zone countries, but it seems likely that several of them might follow suit later this week,” Goldman said. “Policymakers are determined to protect the euro zone, and they have identified the financial markets as the key obstacle for stability, which implies risks of further regulation.”
But the sudden focus on short selling mean policymakers are taking their eye off the ball, namely the structural imbalances that led to the debt crisis in the first place, Jan Lambregts, global head of financial markets research at Rabobank, said.