Analyst view: Germany’s ban on short-selling causes panic

SINGAPORE (BestGrowthStock) – Germany’s ban on speculative short-selling of some securities hit financial markets across the board on Wednesday, with the euro plunging to a four-year low and Asian shares and currencies falling on heightened risk aversion.

Germany said naked short sales of euro-denominated government bonds, credit default swaps based on those bonds, and shares in Germany’s 10 leading financial institutions will be prohibited from now through March 31, 2011.

In naked short selling, a trader sells a financial instrument short, betting that its price will fall, without first borrowing the instrument or ensuring that it can be borrowed, as would be done in a conventional short sale.

Analysts were however skeptical that the move would be successful in taming market volatility.

Following are a selection of analysts’ views:

PIERRE FADDOUL, CREDIT ANALYST, ABERDEEN ASSET MANAGEMENT, SINGAPORE

“The banking industry (Read more about the banking industry recovery.) as a whole, mostly in Europe and in the U.S. because these were mostly damaged, will undergo a lot of regulation going forward. That will be on many aspects. The first one will be on national aspect, which is the central bank will impose more rules to avoid another credit crisis. Another angle, the Bank for International Settlements, which have already established some guidelines for tighter capital ratios and higher prudential approach on banks’ balance sheets, may also adopt some rules.

“Broadly speaking, I expect more regulations and guidelines. The aim is to make them more prudent in their investment decisions. If you combine this new regulation in Germany with all the other negative headlines we’ve been having in the past few days, most probably European markets will react negatively.”

DARIUSZ KOWALCZYK, CHIEF INVESTMENT STRATEGIST, SJS MARKETS

“Companies where there are short positions may get a small bump today but in the medium or long term it will be negative as investors perceive a high degree of regulatory risk because of the clampdown. There is also the risk that other countries may follow Germany leading to reduction of liquidity in the market, resulting in higher volatility.

“People who are afraid of betting against European assets due to regulatory concerns would move those bets against the euro since there is no ban on short-selling there.”

TIM JAGGER, ASIA PACIFIC HEAD OF CREDIT STRATEGY, ROYAL BANK OF SCOTLAND, SINGAPORE

“The (German) move was politically driven, given the setbacks the ruling party has had in recent times. The more populist voice having a political upper hand is coming to the fore. That’s partly what drove the move. I doubt whether it will proliferate throughout Europe. It will have a negative impact on risk assets.”

RABOBANK NOTE TO INVESTORS

“Germany’s announcement … dented risk appetite as it raises the question as to whether the German regulator knows something the market doesn’t. If there is a secret here, it can’t possibly be a positive one.”

BRAYAN LAI, CREDIT ANALYST, CREDIT AGRICOLE CIB

“They are the only one, it’s not the whole of Europe. It’s a unilateral move, not a coordinated one. They’ve actually given some hints that they will do something like that. By right, naked shorts should not be allowed in the first place. It won’t exacerbate the selloff that we have been seeing. In many ways, the confidence in the euro is definitely shaken.

“We are going to see the Eurozone constantly tested and regulators will likely have to intervene. I see it more as a confidence and sentiment issue. To a certain extent, yes, we might see some selling pressure on CDS. No short selling of credits means banning CDS because CDS is a way to short credits. But changing such rules such as this is not going to dampen the fact that investors have a real hedging need on certain assets that they own already.”

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Analyst view: Germany’s ban on short-selling causes panic