Spain bans short-selling of shares as markets fall

 

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Spain has banned short-selling of shares to try to limit price moves after markets fell sharply on fears the country may need a full bailout.

Spain's market regulator blocked the practice for three months to try to restore order after sharp falls in bonds and shares.

"Short-selling" is a way that traders can make money by betting on falling share prices.

Italy has also banned short-selling of financial stocks for one week.

'Extreme volatility'

Short-selling is a technique used by investors who think the price of an asset, such as shares, will fall.

They borrow the asset from another investor and then sell it in the relevant market. The aim is to buy back the asset at a lower price and return it to its owner, making a profit along the way.

In a statement, Spain's CNMV regulator said it was imposing the ban in order to maintain market order: "The situation of extreme volatility across the European markets could interfere with their smooth functioning and the normal course of their activities."

Crisis jargon buster
Use the dropdown for easy-to-understand explanations of key financial terms:
AAA-rating
The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule.

It is not the first time that such a curb has been used by regulators. Almost a year ago, France and Belgium joined Spain and Italy in a ban on short-selling financial stocks to try to stabilise bank shares which had fallen sharply.

Markets have had a turbulent few days on fears that Spain's indebted regional governments will push the country towards a full bailout.

On Friday, Valencia, one of the country's 17 regions, asked the central government for a financial lifeline, and on Sunday, the Murcia region said it was considering following suit.

Shares in Europe fell when trading got underway on Monday, with Spain's main share index, the Ibex, down 5% at one point. It recovered slightly to close down 1% but Germany's Dax ended the day down 3%.

The US share markets opened with a downward jolt and the euro hit a new two-year low against the dollar.

'No help'

Spain's economy minister denied the country needed more help.

Start Quote

Spain's fragility is one you know well: the leg bone of an economy in a recession estimated to last two years is connected to the knee bone of undercapitalised banks is connected to the thigh bone of regions with debts they can't repay is connected to the hip bone of a government which cannot borrow at affordable rates”

End Quote

Luis de Guindos said: "We have made important economic reforms and we just reached an agreement with our regional partners over the recapitalisation of the banks, and from there we have done all what we could to establish the bases of a return to a healthy growth for Spain's economy."

Mr Guindos is due to meet his German counterpart in Berlin on Tuesday.

Markets remained unsettled. The yield on Spain's 10-year bonds reached a new euro-era high of 7.56% before falling back to 7.39% in late afternoon trading.

The bond yield indicates the interest rate the government would have to pay to borrow new money, and acts as a measure of investor confidence in Spain's creditworthiness.

Spain has already asked for and been granted a 100bn-euros bailout for its banks, so far avoiding asking for the same sort of national bailout that was needed by Greece, the Republic of Ireland and Portugal.

However, on Friday the Valencia region said it would be the first region to seek financial help from an 18bn-euro fund set up to help the country's regions.

Analysis

A yield, or interest rate, of 7.5% on 10-year bonds takes Spain even further into the danger zone.

Higher borrowing costs can make the difference between a debt situation that is a problem and one this is ultimately unsustainable.

But the impact on the interest bill is slow. It's like turning an oil tanker.

When governments borrow they generally do by selling bonds - which are a promise to repay - and the interest rate is fixed for the lifetime of each batch of bonds. Each time Spain goes to the market for new money, the interest rate it pays then feeds into its total borrowing costs.

The general trend is upwards and that means the tanker is gradually turning towards the rocks. The eurozone has to decide whether to grab the wheel, giving a new bailout to keep those borrowing costs from rising further.

On Sunday, Murcia's government said: "Regarding the liquidity fund provided by the state, the regional government has repeatedly stated that it is studying whether to apply for it."

There is speculation that other regions are also considering seeking assistance, creating further pressure on central government finances.

There was more bad news for Spain on Monday when the Bank of Spain said the country's economy contracted by 0.4% in the three months to the end of June, having shrunk by 0.3% in the previous quarter.

Eurozone jitters also spread to Italy, which is also struggling with high debts. The main Italian share index closed down 2.7% with banks being the worst hit. UniCredit and Intesa Sanpaolo were among six Italian banks suspended from trading after their share prices fell sharply.

On the currency markets, the euro fell to a two-year low against the US dollar, at $1.2082 at one point on Monday and an 11-year low against the Japanese yen, 94.37 yen, its lowest level since November 2000, before recovering slightly.

The price of oil has also fallen by nearly 3%, a sign that markets think there will be waning demand for oil as a result of worsening economic prospects.

 

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  • rate this
    +1

    Comment number 566.

    Banning short-selling will just lead to a slow tailspin - short sellers are the only people in the market who have to buy sooner or later, and market makers know that if they can drive them out of the market they will be rewarded with a pop upwards as they cover their unprofitable positions. They are as much a part of a healthy market as anyone else - and all participants have the same goal.

  • rate this
    +3

    Comment number 450.

    The main problem with short selling is that it increases short term market volatility, i.e. if a share is falling, lots of short sellers could make it fall faster for a bit. Sudden price drops look more alarming and cause more worry, which can lead to others being frightened into selling.
    The Govt are banning it (temporarily) to avoid panic selling...

  • rate this
    +13

    Comment number 403.

    Short selling is not carried out by investors, It is simply gambling on share price movements, usually with investors' money. It should be banned altogether.
    The euro is clearly fundamentally flawed. and preparations should be pt in place for its inevitable demise.
    All banks should be forced to separate their normal banking activities from so called investment banking to protect depositors.

  • rate this
    +14

    Comment number 388.

    Short selling is not "money for nothing". The short seller is assuming the risk that shares will fall. If they rise they lose. There is also always 2 sides to every trade so someone bought them. Of course, if governments had not allowed a credit bubble to form and borrowed un-payable sums themselves to buy votes, then sovereign debt would not be a problem.

  • rate this
    +26

    Comment number 242.

    People may argue the short selling increass liquidity but I think those are the one that are intrested in one thing volatility. Liquidity was the excuse; the real reason is to get more people to transact so people inbetween can skim margins and pretend that there is a boyant market. A Market that nowadays is not based on fundamentals or how solid companies and their management are but on rumours.

 

Comments 5 of 13

 

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