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."

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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
    -3

    Comment number 455.

    Not a suprising move; the likely targets of short selling would be Spanish financial institutions holding massive piles of European sovereign debt. Once again, the EU refuses to let the market operate and bankrupt its insolvent banks! And the Spanish regulator has the nerve to talk about market interference! Madness.

  • rate this
    -2

    Comment number 454.

    Totally agree with RobertoB.

    That short selling is allowed to happen to me is evidence that 'the regulators' encourage financial gambling by allowing it to happen at all.

  • Comment number 453.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this
    +1

    Comment number 452.

    399.
    Andy The Thinker
    35 Minutes ago

    The Oxford English Dictionary is adding a new slang word next edition: -

    do a Euro: screw-up by an incompetent buffoon in denial.
    I think you have got that completely wrong. The £ is going down the toilet, its called doing an "Osbourne" anything to protect his fraudulent paymasters! The Euro will survive despite the bankrupt USA supported by the bust UK.

  • rate this
    0

    Comment number 451.

    It only takes one and EU are both of them.. %0{ !

  • 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
    -8

    Comment number 449.

    Bye Bye Euro, goodbye. About time these countries started looking after their population rather than an elite of euro mps and Germany. Is it any surprise, this was predicted a long time ago and until they finally admit defeat europe and the world will never start to recover.

  • rate this
    -1

    Comment number 448.

    This is yet another damning verdict on Keynsian economics, and more significantly; socialism. Spain haven't adopted any austerity measures, only cutting the rate of spending. Unless European countries cut the size of their governments and welfare states (Corporate and social), then this going to be a continuing trend.

    You don't see the Swiss or Germans experiencing economic hardship do you?

  • rate this
    +2

    Comment number 447.

    So let's get this right. Spain are in a mess and can't afford to repay their debts. So what we need to do is lend them more money and.....err... some sort of miracle happens?

  • rate this
    +1

    Comment number 446.

    The point here that it is a big Casino. Where are all the great Kings and Emperors who had a firm grip on the economy? Now there is no control, no regulation just the Wild West.

  • rate this
    -1

    Comment number 445.

    But why just talk about the EU?
    http://online.wsj.com/article/SB10001424052970203986604577253272042239982.html

    Buying and selling derivatives market necessitated a $16 TRILLION (illegal) exchange from the FED to EU banks.
    This was to prevent the WORLD financial sector ALL imploding.

    Who pays if shorts go wrong and there is no money cover?
    Banks cash flows are leveraged and exacerbate loss.

  • rate this
    -6

    Comment number 444.

    "As I pointed out (and documented) much earlier neoNazis are on a rise in Germany; particularly in the former DDR. [neofascist NPD gaining votes there faster than any other party]."

    That comment gaining negatives from easily determined quarters just proves my point: that German jingoists are on the rise again.

    ["How soon they forget!"]

    P.S. UK didn't get Marshall Plan. W. Germany did.

  • rate this
    +1

    Comment number 443.

    Past caring. Let's get the usual monthly scaremongering over please.

  • rate this
    +2

    Comment number 442.

    438. Reflections_Germany

    Cancel the show of monarchies to save a lot of money!
    +++
    Who do you think being controlling ''The Markets'' in Europe for the past 600 years.

  • rate this
    +1

    Comment number 441.

    430. Reflections_Germany 8 MINUTES AGO

    Proud....well yes, but the EU is (rightfully) in thrall of Germany it's biggest power. However, should you be proud of an EU that has screwed over virtually all its smaller member states?

    Pity the poor French....you scared them into a political union lest you invaded again.... De Gaulle knew it well ;)

  • rate this
    -1

    Comment number 440.

    It is looking like the northern EU countries are very quiet at the moment re, Spain and Greece. Seems to me like they will ignore thier pleas for more money and it is obvious then what will happen. Most banks who gave loans initially have had plenty of time to get rid of their loans they gave to Spain and Greece. The only banks buying their debt for the past few months are their own internal banks

  • rate this
    -1

    Comment number 439.

    403.
    RobertoB Editors Choice? someone is having a laugh! Your 1st paragraph is totally at odds with last part of the statement. perhaps the editor has the same level of understanding that you have. Total nonsense, look closer at home & you get the answer, manipulation & market short selling + deliberate asset inflation. Total criminal greed supported by an incompetent government bought + paid for.

  • rate this
    -1

    Comment number 438.

    Spain/UK have debt problems.

    Cancel the show of monarchies to save a lot of money!

    Don´t tell me the Royal Weddings/Jubillees are cheap!
    William and Harry said they want to be normal instead of Royals.

    Open up access to the highest position for every UK citizen!

    Criteria for public positions are NOT accidently born into the Royal family, but personal effort, suitability and qualification!

  • rate this
    -9

    Comment number 437.

    It is the job of government to govern, not the markets. The markets are not rational and need regulation. The euro mess is too big to expect the political spivs who created it to solve it. Time to stop the EU/Euro experiment and reintroduce democracy to the euro states. There is no money to bail out the bankrupt nations and no hope of them ever paying it back. We need leadership and we need it now

  • rate this
    +2

    Comment number 436.

    The "markets" system is rotten to the core. It has nothing to do with investment or society, it is about non-market short-term speculations, money laundering, invisible price fixes, legal niches and tax loopholes. It needs to be dismantled before it brings in another European conflict. It keeps doing harm and needs not to be tolerated.

 

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