Germany declares solo war on speculators, markets sag

 

Germany declared war on speculators on Wednesday, wrongfooting European partners who said they were not consulted about an overnight ban on naked short sales of a range of assets that sent markets reeling.

Chancellor Angela Merkel urged EU leaders to speed up financial market supervision and introduce a new tax on them, saying Berlin was ready to act alone on a ban on activities which some leaders blame for deepening the euro zone's debt crisis.

Germany's financial regulator said the ban was "due to the extraordinary volatility in government bonds in the euro zone." Massive short-selling could have endangered the stability of the financial system, it said.

Merkel told Germany's parliament EU leaders had to ensure markets could not "extort" the state anymore and the bloc would introduce its own financial transaction tax or levy if the Group of 20 nations failed to reach a deal in June.

"I'll boil it down to its core: The euro is the foundation for growth and prosperity, along with the common market - also for Germany. The euro is in danger" she told parliament.

Her comment heaped fresh pressure on the euro, which had already tumbled overnight on the back of Germany's plan to ban naked short-selling of some financial shares, as well as on euro government bonds and related transactions in credit default swaps (CDS).

Credit default swaps, a type of derivative, insure against the risk of debt defaults. Short selling is a trade that bets a price will fall.

Naked short selling involves a trader selling a financial instrument without first borrowing the instrument or ensuring that it can be borrowed, as would be done in a conventional short sale.

A German Finance Ministry spokesman said the naked short sale ban would run until March 31, 2011.

It was not clear how Germany could enforce the ban effectively in the debt and CDS markets, which stretch across national borders.

EU PARTNERS LEFT IN DARK

German Finance Minister Wolfgang Schaeuble said late on Tuesday Berlin had acted in anticipation of European rules discussed at a meeting of EU finance ministers earlier in the day.

"We said 'We'll go first' because it was precisely that part of the speculation in the recent months with government bonds in the euro zone caused us such concern."

But France said on Wednesday it was not considering banning naked short-selling on European debt and said it had not been consulted.

"It seems to me that one ought to at least seek the advice of the other member states concerned by this measure" Economy Minister Christine Lagarde said.

A European Commission spokeswoman confirmed EU finance ministers did not discuss on Tuesday Germany's decision, announced later that day.

The EU commissioner for internal markets and financial regulation, Michel Barnier, said in a statement: "These measures will be even more efficient if they are coordinated at European level.

"It is important that member states act together and that we design a European regime to avoid regulatory arbitrage and fragmentation both with the EU and globally."

He said Germany's moves against derivatives should be discussed at a finance ministers' meeting on Friday.

"100 PERCENT WRONG"

Some analysts suggested Germany's ban might be an attempt to get markets under control before further negative developments in the euro zone debt crisis - conceivably even a restructuring of Greek debt, which officials have so far ruled out.

In her speech to lawmakers, Merkel demanded tough action against "notorious deficit sinners" in the euro zone, such as loss of voting rights, to create an incentive for budget rigour.

"Above all, what's necessary is to develop a process for an orderly state insolvency" she said, though she did not refer to any country by name.

However, analysts said there were concerns the German ban would constrict the ability of the markets to be able to manage risk and hedge positions, causing investors to move out of it.

"Rather strangely, Eurocrats have a 'barbarians-at-the-gate' view of what is going on, that the EMU citadel is under siege and all resources are needed to repel (them)" said Stephen Jen of the BlueGold hedge fund.

"I think this view is close to 100 percent off the mark. If anything ... the biggest sellers of European bonds are European pension funds, not U.S. hedge funds," he said.

Germany's lack of coordination with other euro zone members underscored how the measures may unsettle, rather than calm, markets already nervous about the debt crisis.

Rabobank said Germany's move had 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."

However, Commerzbank CEO Martin Blessing told shareholders that short selling and credit default swaps should be regulated. While they served as a warning light on Greece's debt, they "also unnecessarily aggravated the situation, and even increased the risk of a default."

The euro - not covered by the ban - was the first casualty of the Germany move, hitting a fresh four-year low.

The clampdown announced by Europe's biggest economy hit markets hard. The FTSEurofirst 300 was down 2.25 percent at 12:36 p.m. British time, and most major European indices fell.