Eurozone may not be helped by naked shorts ban
Bafin, the German financial regulator, was on the blower last night to other European regulators, trying to persuade them to participate in its attempt to ban purely speculative bets by investors that eurozone governments will have growing difficulties paying their debts and that the woes of banks will also worsen.
Unless other regulators do the same - and there were signs last night that some important ones may not - it's difficult to see how the German initiative can have much impact, given that the trading of government bonds and bank shares is a global business.
Or to put it another way, very few of the investors doing the short-selling that Bafin wants to prohibit are German and almost all the relevant securities are traded in financial markets other than Germany's.
Which is not to say that it won't have any effect at all, though not necessarily of the sort that Bafin or the German government desires.
Investors see it as a fairly desperate attempt to ease strains in eurozone markets and fear that it shows that eurozone governments are running out of policy options to hold the eurozone together - so they have sold the euro, which has fallen to its lowest level against the dollar for four years.
What Bafin is trying to do is reduce the volatility of financial markets and the instability of the financial system. But it could have the opposite effect, even if Bafin secures agreement on a Europe-wide prohibition - because the distinction that Bafin wishes to draw between naked short selling, which it hates, and hedging, which it thinks is acceptable, is not as clear cut as it appears to believe.
The German ban is three-pronged: on short sales of eurozone government debt unless the investor has first borrowed the stock; on the use of credit derivatives to bet on a fall in the value of the debt of a eurozone government, unless the investor owns some of the relevant debt; and on short sales of the shares of German banks and insurers, unless the investor has first borrowed the shares.
Bafin sees this as an attempt to put a stop to what it would see as mischievous bets by investors that the financial difficulties of the likes of Greece and Portugal will worsen.
It thinks that such bets are what force down the price of Greek and Portuguese government bonds, which then spook investors, and make it much more difficult and expensive for the likes of the Greek and Portuguese governments to borrow vital new money.
That may be so.
But there's an alternative narrative about the use of naked shorts and credit default swaps which would show them to be less malign than Bafin would believe and which would imply that their prohibition could increase the vulnerability of financially overstretched eurozone governments.
Many investors use credit default swaps taken out on the debt of one government to hedge exposure to some other kind of investment in the same country or to the debt of another eurozone government, inter alia.
So banning the use of credit derivatives and naked short-sales for eurozone government debt could prompt some investors to liquidate those "long" investments and lessen investors' appetite for investing in the eurozone in general.
Which, at the moment when eurozone governments and banks need all the credit they can lay their hands on, would not be the result favoured by the German government.
Update, 11:40: I now have clarification of the scope of the Bafin ban.
It applies only to trading by the financial firms it regulates - and only to naked shorts and CDS's in those eurozone government bonds listed in Germany and also to German banks/insurers listed there.
So its direct impact on speculation in those securities will be only limited, as I pointed out earlier.
Here's the proof of its toothlessness: Deutsche Bank's London branch has agreed to abide by the ban (though I'm unclear that it was obliged to do so), whereas the London operations of Goldman Sachs and Morgan Stanley can continue shorting these products to their heart's content.
As to whether other countries might follow Germany's lead, I am hearing that Austria and Belgium may well impose similar bans - but there's no sign of the larger economies doing so.
So what's motivating the Germans?
Well the view from the London markets is that it's all about persuading German voters and politicians that supposedly horrid speculators are being knee-capped, to allay their concerns that German participation in the great trillion dollar bailout of the eurozone isn't throwing good money after bad.
And never mind that some of these horrid speculators might have funds to invest in the eurozone, and may now take their money to places where they're more welcome.