German Chancellor Angela Merkel said on Wednesday that “the Euro is in danger.”
So what does she do about it?
Firstly she backs a multi-billion euro rescue package for the euro zone bond market and offer support for Greece. Then, under extreme political pressure at home she looks for someone to blame.
Who could she blame? There are lots of options.
She could blame the Portuguese, the Irish, the Greeks or the Spanish (collectively the “PIGS”) OR she could follow a well worn path and blame a combination of hedge funds, short sellers and speculators.
Unfortunately - she chose the later.
Short sellers are the “whipping boys” of financial markets and Chancellor Merkel is playing to political gallery by turning her fire upon what she sees as the Anglo-Saxon speculators.
Firstly, on 17th May, she joined with France and drove through the Alternative Investment Fund Managers (AIFM) Directive legislation which include increased transparency, setting the limit for use of debt as well as on bonuses. Only the UK and Czech Republic voted against the Directive.
Secondly, today, she decides to ban naked short selling of German bank stocks, euro-zone bonds and credit default swaps (“CDS”).
As my friend, Julian Pittam, said on CNBC earlier “The naked short ban will not stop people borrowing and selling stocks and has not stopped the shorts in other countries. Investors could go out today, borrow stock in German banks and short them anyway.”
The volume of naked short selling in the equity markets is tiny and the German financial stocks selected by the Chancellor for protection don’t need it and are very easily (and cheaply) borrowed should they need to be.
The idea that you cannot buy a CDS without proving you are long the bond is like banning the trading of pork belly futures unless you own a pig farm – it is ridiculous.
It is difficult to believe that the German’s have made this decision alone – as it could potentially undermine Frankfurt’s status as a financial centre – but time of writing it seems as though they have.
The UK’s Financial Services Authority said that the prohibition would not apply to branches of German institutions outside the Germany or in the UK.
In the middle of what is a European wide crisis the Chancellor has taken a break from addressing the real problems at hand – namely the structural imbalances that led to the European debt crisis in the first place and “kicked the dog.”
It is extremely unfortunate that this decision has been made in the first place - but it is likely to be compounded later in the week.
The Austrians will attempt to extend the naked short selling ban European-wide at a meeting of Finance Ministers is of even greater concern.
My advice to politicians is to encourage them to focus on the very real problems at hand rather than to experiment with ill conceived regulation that may play well politically but could irreparably damage the efficiency of the capital markets. Efficient markets do not always rise but the existence of contrary views and short side liquidity aid efficiency.
