Germany implements restrictions on financial markets. Is this a policy error?

At this stage the details are very limited but it appears that the German supervisory body BaFin has banned the “naked” short selling of Eurozone sovereign bonds, their credit default swaps, and the shares of ten leading German financial institutions. The ban was effective as of midnight last night.

This move by the German authorities has had the effect of spooking already fragile markets. As we have discussed before markets do not like a lack of transparency and these actions appear to be draconian and uncoordinated. The fact that the ban was announced after the European market closed and was implemented only a few hours later is nothing short of reckless and has the market speculating about larger, unknown problems.

The S&P 500 closed about 1.5% lower last night and European markets are currently seeing a flight to quality on their open.

This announcement appears to be largely symbolic and arguably politically driven. The vast majority of derivative trading that Germany has banned actually takes place outside of Germany. The German authority simply does not have the legal jurisdiction to implement the ban in major financial centres like London and New York in respect of non-German domiciled institutions. It is a question for the lawyers whether this ban extends to German domiciled financial institutions trading in different jurisdictions, either through branches of the German domiciled parent or through foreign domiciled subsidiaries.

I wouldn’t  be surprised if domestic German institutions are able to find a way around the legislation. The unintended consequences may see ‘speculators’ merely reset their positions in markets that fall outside of the scope of the ban. Will investors express their negative view on Europe by further selling the Euro currency?

As with the recent $1 trillion package to support the Eurozone the short selling ban is an effort to buy time and take pressure off the EU economies. The fact is that neither of these actions address the long term solvency of a number of Europe economies and is likely to further set the cat amongst the pigeons.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Categorised as: macro and politics credit

Discuss Article

  1. Doug Brodie says:

    Not totally convinced that the Germans are as dumb as they appear. In terms of a 'fair and balanced' market, the use of significantly leveraged trading funds to book a short term profit at the expense of whole economies does have a finite end.

    The bail outs over the last two years kept solvent – in style at least – the counter-parties of the cds's and the providers of the funds' liquidity. What we have been seeing in the euro is simply biting the hand that feeds – the Fed would suffer significant damage in a collapse of the euro, and clearly the trading funds (and their investors) need to see past the end of this month's P&L to value the impact of their positions. There's no point in having all the money in a poker game: the game just stops. If the sovereigns need to bring all their assets to bear on supporting the currency, their will nothing left to fill the role as lender of last resort.

    Those of a certain age will know that an errant teenager looks for the edge and keeps pushing, and philosophically he/she is just looking for a firm boundary and the security that provides. The funds clearly need the boundaries defined.

    Posted on: 19/05/10 | 12:00 am
  2. JJohn McD says:

    How can the announcement be bit 'draconian' and 'largely symbolic' at the same time? If the German market is not so significant, and is easily circumvented, why have markets reacted so severely?

    Who has the better argument: traders, that short selling provides liquidity, or regulators/politicians, that it creates or sustains the price fall that is anticipated?

    Posted on: 19/05/10 | 12:00 am
  3. longodds says:

    I favour the simplistic view that they know something we don't and are pulling up the drawbridge – hope I am wrong but that's the way I am betting

    Posted on: 20/05/10 | 12:00 am
  4. dturner says:

    I think it's a possibly error in many respects, and this article does a good job summing them up as well:

    Posted on: 21/05/10 | 12:00 am
  5. Anonymous says:

    Longodds me thinks you got it.  It's called "Austrian Economics."  Listen carefully as Merkel and Weber start turning the screws on the southern banksters.  Already the southern banksters are calling Merkel naive–she/they are not.  If you want her country's money she will make one play by her rules, Austrian Rules.  As a debtor nation, a country takes the pain or gracefully restructures or gets out of the EU.  She has stated Germany is buying time to see how this bailout plays out.  If it does not play out as she wishes, they have time and money to cover Germany's banksters and set up shop with those countries such as Finland, Netherlands, etc which have shown fiscal responsibility and have the where-with-all to buy their goods.  The US has more 'skin' in this EU game than does Germany.  In the mean time, a cheap Euro caused by the EU debt crises helps Germany and hurts the southern nations, the US and China dearly as she waits.

    Posted on: 26/05/10 | 12:00 am

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