GFS LinkedIn
GFS Facebook
GFS Twitter
GFS RSS feed

Caught short

Thursday 10 June 2010 - by Bernadette Mill

Germany’s decision to ban naked short selling has done it no favours on the global stage and the government was widely criticised for acting unilaterally. Bernadette Mill examines the implications

The German Federal Financial Supervisory Authority (BaFin) shocked the financial world when it banned the use of naked short selling last month.

The ban is effective from 19 May 2010 to 31 March 2011 and also extends to using credit derivatives for speculating on a reduction in the value of debt in a eurozone country. This is only permissible if an investor owns a portion of the relevant debt.

Short selling is the term used to describe the sale of a financial instrument or product that the seller does not physically own. A vendor can engage in a ‘covered’ short sale by borrowing the product that he has agreed to make available to a buyer. Naked short selling takes place in the absence of this.
Chancellor Merkel’s decision has been greeted with heavy criticism.

Seven Investment Management director Justin Urquhart Stewart says: “The main issue is it misses the point and can be likened to ‘shooting the canary in a mine’. It is a political decision – there was clearly no thought for the implications this might have. It is an easy populist target for a politician to take.”


Urquhart Stewart says the sudden withdrawal created more tension because the markets thought there was something worse out there.

He says: “A more sensible approach would have been to make a statement that all short selling needs to be transparent. To most private investors, it sounds like a terrible gambling tool. This decision would have had a much more positive impact had it been coordinated, at present it just looks like a knee-jerk reaction.”

Economics Professor Joerg Bibow at the Skidmore College in the US says: “Germany’s decision came out of the blue, it definitely surprised Germany’s partners in Europe given the economic crisis is about a lack of co-ordination and co-operation. Making a unilateral decision without consulting anyone is an ill-advised move, especially in the current climate.”

Professor Bibow says if the motivation was shock value then Germany has succeeded, but that it cannot be a particularly effective move to go it alone.


Article pages: |   1  |  2  |  3  |



WHAT DO YOU THINK?
 
Name:
   
Email:
   
Comment:
   
Post as Anonymous
  Display name
   
Please, enter security code
   
 

No comments yet.
INTERVIEWS & FEATURES
What corruption really costs
Heidi Lawson, partner at Chadbourne & Parke LLP, looks at the impact of compliance and corruption on a company's value.

STRAW POLL

Will markets in 2012 have a tougher time than 2011?

Yes

No

Don't know

View results

FIND A REGION world regions