Germany announced last night that it would ban short-selling, an unprecedented step when there is no cataclysmic emergency. The ban has caused stocks to drop precipitously in worldwide markets.
Global stocks fell Wednesday after Germany shocked investors with measures designed to hamper market speculation, and data showed U.S. consumer prices turned negative last month.But the euro bounced back broadly amid rumors that the Swiss National Bank had intervened in the currency market, buying euros to drive down the price of the Swiss franc, which has been a haven for investors worried about Europe’s problems.
The German financial regulator BaFin announced late Tuesday that it would ban naked short-selling in shares of 10 of the country’s most important financial institutions. The ban, which took effect Wednesday and will last until March 31, 2011, would also apply to naked short-selling of credit-default swaps and euro-zone government bonds.
In a short sale, an investor sells borrowed shares, hoping to buy them back later at a lower price and profit from the difference. In a naked short sale, they sell without borrowing the shares first.
Such bans were enacted at the height of the crisis in autumn 2008, but analysts said Germany’s move suggested that the situation might be getting worse.
Most experts agree that it is the ban that is adversely effecting stocks, but it is conceivable that it could be some other event. If it was Germany’s ban that had this effect, one wonders if this is what Merkel hoped to accomplish…