European attack on speculators sends euro skidding
AP Business Writer
LONDON – European leaders are stepping up their attack on what they characterize as greedy and ruthless speculators, accusing them of worsening the continent’s government debt crisis.
But analysts say some of the measures they are taking could backfire by undermining the euro instead of supporting it.
In the space of a few hours on Tuesday, EU governments overrode British objections and U.S. worries to tighten rules for hedge funds, and Germany’s securities regulator unilaterally announced curbs on traders of government debt and bank stocks.
The unexpected decision by Germany to ban so-called naked short-selling of eurozone government bonds, as well as shares in ten key German financial institutions until March 31, sent shockwaves through the markets Wednesday.
Europe’s main stock markets all closed around 3 percent lower Wednesday after the euro sank to a four-year low against the dollar.
“While politicians are still trying to blame speculators for the fall in the euro, it’s the market’s loss in confidence in these politicians’ ability to implement the austerity measures needed domestically that is at the root of its decline in value,” said Mark O’Sullivan, director of dealing at foreign exchange firm Currencies Direct.
“Germany’s actions are little more than window dressing to please an electorate already unhappy with having to bail out their European neighbours,” he added.
Germany’s step echoes an earlier move taken in Greece – the most debt-laden eurozone country – and similar short-term, now-expired measures undertaken in the U.S. and Britain at the height of the financial crisis in the autumn of 2008 in the wake of the collapse of Lehman Brothers.
Short selling, a way of betting a financial asset will fall in price, typically involves traders selling borrowed shares in the hope of buying them cheaper later and profiting on the difference. A “naked” short is when traders sell shares without borrowing them first.
Germany’s move also came after the EU passed new rules requiring lightly regulated hedge funds, regularly blamed by politicians for worsening market turbulence, to register with regulators. They’ll also have to hand over information about their trading as well show they have sufficient capital set aside to cover their losses on risky trades – as banks do already.
German Chancellor Angela Merkel called for reasserting “the primacy of politics” over markets, blaming market misbehavior for worsening Europe’s debt woes.
Fears that heavily indebted governments will not pay their debts has shaken stock and bond markets and raised concerns about the health of Europe’s banks, which hold large mounts of government bonds that sag in value as confidence in state finances wanes.
That, in turn, could lead to financial panic and another recession.
So the moves against markets have populist appeal, especially coming after Merkel’s conservative governing coalition lost an important regional election. She is currently persuading parliament to put up euro123 billion for a eurozone bailout fund, a measure that gets a sour reception from German voters reluctant to pay for other countries’ overspending.
The head of Germany’s labor union federation, Michael Sommer, earlier this week approved of attacking speculators earlier this week, calling for “order on the national and international financial markets … even if that self-styled elite that we have to thank for the misery whines and howls and does and will do everything to escape sensible rules.”
Even a top German bank CEO agreed with more regulation.
“We think it’s right that a tighter regulatory corset be imposed on financial markets after the experience of the last few quarters,” Martin Blessing of Commerzbank AG said at its annual meeting Wednesday. His is one of the German banks whose shares is covered by the short-selling curbs.
However, the response in the markets has been far more negative.
In fact the step led to further selling of the euro, which dropped to a a four-year low of $1.2146, because it raised fear the German move was a sign of desperation and that the debt crisis is worse than feared. The slide has been so marked over the last few days that there was talk that the European Central Bank was weighing up the possibility of intervening in the currency markets for the first time in a decade to slow the currency’s drop.
That helped the euro clamber off its lows. Nevertheless, the market reaction to the ban may not have been what was intended.
Jane Foley, research director at Forex.com, said the decision may focus currency markets attention on the foreign exchange market. If traders cannot bet against government bonds, they may simply bet against the euro as a convenient proxy target.
“This implies the timing of the announcement may be politically motivated and designed to win back some credibility for the German government,” said Foley.
Neil Mackinnon, global macro strategist at VTB Capital, thinks blaming speculators is a distraction from the real reason behind the crisis – the failure of the eurozone to properly police the budgets of its more profligate members.
“This mindset is typical in the eurozone and reflects a long-standing distrust and dislike of ‘Anglo-American’ markets,” said Mackinnon.
“Policymakers would prefer to close down the markets and avoid any questioning of the appropriateness, sustainability (or otherwise) of their economic policies,” he added.
In the markets, the ban also brought back memories of an attempt – widely considered unsuccessful – by the U.S. and British authorities to prop up stock markets at the end of 2008 in the wake of the collapse of Lehman Brothers and the ensuing crisis that gripped the banking sector.
In a recent study of the short-selling bans imposed in 2008 for London-based Centre for Economic Policy Research, Professors Alessandro Beber and Marco Pagano found that the “knee-jerk reaction of most stock exchange regulators around the globe to the financial crisis…was at best neutral in its effects on stock prices.”
The best conclusion, the authors said, came from then Securities and Exchange Commission chairman Christopher Cox at the end of 2008 after the U.S. regulator had prohibited short-selling of financial stocks in the wake of Lehman’s collapse.
“Knowing what we know now, (we) would not do it again. The costs appear to outweigh the benefits,” Cox said.