Coming hot on the heels of the EU’s restriction on hedge funds because of the role they played in the financial crisis (though this role was in fact pretty minimal) comes the latest European attempt to deal with nasty financial market participants. The German government has released the following statement, translation thanks to the FT’s Alphaville column:
The Federal Financial Supervisory Authority has on Tuesday temporarily banned naked short sales of debt securities issued by eurozone countries for trading on domestic stock exchanges in the regulated market. It has also temporarily banned so-called credit default swaps (CDS) where the reference bond and liability are from a eurozone country, and which does not serve to hedge against default risk (naked CDS).
In addition, BaFin has banned naked short sales in the following financial sector companies:
AAREAL BANK AG
ALLIANZ SE
COMMERZBANK AG
DEUTSCHE BANK AG
DEUTSCHE BÖRSE AG
DEUTSCHE POSTBANK AG
GENERALI Deutschland HOLDING AG
HANNOVER RÜCKVERSICHERUNG AG
MLP AG
MÜNCHENER RÜCKVERSICHERUNGS-GESELLSCHAFT AG
These bans apply from 19 May 2010, 00:00, until 31 March 2011, 24:00, and will be reviewed.
BaFin justifies these steps given extraordinary volatility in debt securities issued by eurozone countries. Furthermore, credit default swaps on the credit default risk of several countries in the eurozone has increased significantly. Against this background, massive short sales of the affected debt securities and the conclusion of naked credit default risk on eurozone countries had led to excessive price shifts, which could have led to significant disadvantages for financial markets and have threatened the stability of the entire financial system.
Faced with these circumstances, BaFin has also banned naked short sales within the selected financial institutions.
The FT notes that “BaFin had previously introduced a ‘transparency system for net short selling positions‘, and found ‘no evidence of massive speculation against Greek bonds‘ in the CDS market.”
Let’s be clear about this. Short sellers are not the cause of the European sovereign debt crisis anymore than they were the cause of the Irish banking crisis.
As an aside, it’s worth noting that this announcement appears to have triggered a pretty serious downward run on the euro. Now I happen to think that this is a good thing in our current economic circumstances but perhaps the “ve must protect ze currency” crowd might remember that much of the demand for the currency comes from people who use it to purchase financial assets. If you keep mucking around with the rules of the games for financial assets denominated in euro, eventually investors pack it in and your currency loses value.
This shouldn’t be too complicated a point to understand. For example, I teach my undergraduates about how a currency’s value depends on the supply and demand for the assets denominated in that currency.