Germany's market regulator announced a ban on Tuesday on so-called naked short-selling of eurozone government debt and shares of major financial companies, a move that came as European officials seek to strengthen control of markets.
The regulator, BaFin, said the ban — which was to take effect at midnight Tuesday and run through March 31 of next year — also would apply to naked credit default swaps involving eurozone debt. The move, it said, was aimed at upholding financial stability amid the continent's persistent debt crisis.
Still, the ban itself appeared to underline markets' concerns about European policymaking, and the euro fell Tuesday evening. It bought around $1.22, after trading well above $1.23 earlier in the day.
BaFin cited the "extraordinary volatility" afflicting eurozone countries' debt certificates and the widening of spreads on credit default swaps for several nations. "Against this background, massive short-selling of the affected debt certificates and the conclusion of naked CDS on loan default risks of eurozone states would have as a consequence further excessive price movements," BaFin said in a statement.
Those could lead to "significant detriment for the financial market and could endanger the stability of the whole financial system," it added. It said the ban would be reviewed continuously. Naked short-selling involves a trader selling shares or investments he doesn't own. Credit default swaps are a type of insurance against a borrower going bankrupt that have become a lucrative market for traders.
European leaders have complained that speculators used credit default swaps on Greek government debt to bet the country would default on its borrowings — raising pressure to the point where it was forced to ask for a bailout. Finance Minister Wolfgang Schaeuble said Germany was acting in anticipation of European regulations expected to be proposed next month.
He pointed to the "great worries" caused by speculation on debt over recent months as the reason for banning short-selling, and added on ZDF television: "We can do that, and when you do something like this, you don't take a long run-up."
"The German ban seems to be a bit of 'flailing,'" Marc Chandler, the chief foreign exchange strategist at Brown Brothers Harriman, a New York investment firm, said in a market commentary. He added that "it appears to be half-baked and not really thought out, and plays into market doubts about European policymaking credibility."
In Washington, Treasury Department spokesman Andrew Williams said there would be no comment on Germany's action.
Chester Spatt, who was chief economist at the U.S. Securities and Exchange Commission from 2004 to 2007, said that Germany's short-selling ban would probably end up causing more market turbulence and not less. "Like many types of well-intentioned regulation, this is likely to misfire," he said in an interview. "During our financial crisis in 2008, there was a ban on short-sales for about three weeks .... That ban was very counterproductive. It didn't help stabilize asset prices at all."
Spatt is currently a finance professor and the director of the Center for Financial Markets at the Tepper School of Business at Carnegie Mellon University in Pittsburgh. The German ban on naked short-selling of financial companies' shares applies to several banks — Aareal Bank AG, Commerzbank AG, Deutsche Bank AG and Deutsche Postbank AG.
Lawmakers from Chancellor Angela Merkel's governing center-right coalition had advocated earlier Tuesday a ban on naked short-selling, among other efforts to beef up regulation. The lawmakers also want to see "a financial transaction or finance activity tax" in Europe and elsewhere, said Volker Kauder, the parliamentary leader of Merkel's conservative bloc.
"We want the stabilization of the euro," he said after a meeting of the coalition's top lawmakers. "But we also want the financial markets to be involved in this stabilization." Merkel said that Germany would press its partners in the Group of 20 on the idea — and if that doesn't succeed, "we will continue to seek a way in Europe." "I think people's wish that (they) want to see something here is justified," she said.
In Brussels earlier Tuesday, European Union governments agreed to tighten rules for freewheeling hedge funds. That decision reflects Europe's newfound resolve to strengthen its regulatory grip on financial markets and crack down on what officials call speculation, which some blame for worsening the financial crisis.