Europe short-selling ban reveals divisions

A piecemeal ban on short-selling of financial stocks in Europe sparked a rush of alternative proposals from countries and regulators on Friday and investors said the row undermined a rally in bank shares.

After a week of wild swings on European markets amid rumors about the health and funding needs of indebted governments and some of their major banks, France, Italy, Spain and Belgium imposed short-selling bans, which varied according to country.

However Britain, the Netherlands and Austria said they saw no need for action, while Germany said it would instead push for a Europe-wide ban on so-called naked short-selling.

The European Commission said a European framework would be more effective, and the chairman of the European Securities and Markets Authority called on policy makers to adopt a plan for bloc-wide rules on short selling "as quickly as possible."

Short-selling is the process through which an investor borrows shares and sells them on the expectation their price will fall and they can be bought back at a lower price.

In a naked short sale, the investor has not borrowed the share, but still bets on a drop in the share price.

Market players said the ban did not tackle the root causes of investors' concerns -- joined-up, long-term fiscal policy in the euro zone - and pointed out that nervous mutual funds were currently behind the sell-off.

"If at the core of this whole rout is disappointment with certain irresponsible behaviors of policymakers - note the game of chicken in the U.S. - they really need to get their act together and prove they aren't all on holiday," said Lothar Mental, chief investment officer at Octopus Investments.

A crackdown on speculative short-selling is unlikely to arrest moves from institutional investors who have decided they have little stomach for big holdings in banks and indebted governments who might call on them again for emergency capital.

"Data from various regulators of late have shown there is no short-selling activity out of the norm," said Davide Burani, financial analyst at Italian fund manager Horatius.

"Investors are selling in Italy from fear. Italian banks are holding around 200 billion euros of Italian bonds."

On Friday the STOXX Europe 600 banking index moved steadily higher. By 1320 GMT it showed a 4.9 percent gain, helping the broader market to advance 3.6 percent.

French banks, at the center of attention and included in the ban on short-selling, were up: Societe Generale rose 5.3 percent, BNP Paribas added 6 percent and Credit Agricole gained 3.5 percent.

Alessandro Frigerio, fund manager at Milan's RMJ Sgr said the ban could work if, combined with proposals from next Tuesday's meeting of French President Nicholas Sarkozy and German Chancellor Angela Merkel, it were to "give the idea that there could be a rescue for the euro zone."

Global hedge fund association the Alternative Investment Management Association (AIMA) warned however that the short-selling bans could make markets less stable.

"Past experience has shown that bans on short selling do not prevent market falls and indeed can exacerbate volatility," AIMA CEO Andrew Baker said in a statement.

"Short-selling ... contributes to efficient price discovery, increases market liquidity, facilitates hedging and other risk management activities and can possibly help mitigate market bubbles," he said.

"Abusive" strategy

The European Securities and Markets Authority (ESMA) said on Thursday that short-selling combined with rumor-mongering created a strategy that was "clearly abusive."

In an interview with Reuters TV on Friday, ESMA Chairman Steven Maijoor added the curbs would be in place for "a while" but that they would not be permanent.

"There are no concrete plans at this stage for other countries, but we cannot rule out that that might change in the coming days and weeks and months," Maijoor said.

A German banking source familiar with regulation issues criticized the ESMA and said it had failed to play its role as coordinator among EU countries.

"What kind of coordination has the ESMA delivered? Not much," the source said, adding that Britain was the main obstacle to a coordinated move against short sellers due to fears such a ban would hurt its financial sector.

France banned short selling on 11 financial stocks for 15 days, Spain said it would protect 16 stocks for 15 days, Belgium banned short selling of four financial stocks for an indefinite period and Italy said its ban covered 29 companies in the banking and insurance sector.

French Finance Minister Francois Baroin welcomed the ban and said it highlighted the government's commitment to ensuring financial stability, avoiding market abuses and fighting against all forms of speculation.

French 10-year bond yields dipped below three percent on Friday for the first time since November showing demand for the country's debt remained intact despite banking sector concerns.

Reassuring data from the European Central Bank helped: the ECB said its overnight loan facility totaled 227 million euros, much lower than the 4 billion euros borrowed the previous night, easing fears that banks were facing liquidity issues.

However, Danish Economics and Business Minister Brian Mikkelsen said several small Danish banks are facing a liquidity squeeze and the government was working on measures to make it safe for foreign investors to lend to them.

France and Italy said they would take action against investors who combined rumor-mongering and short-selling to manipulate banking shares. The French Banking Federation said French banks were considering legal action, while Italy's Consob said it would fine those who disregarded the short-selling ban.

Germany said only a wide-reaching ban on naked short-selling would do.

"We are advocating a wide-reaching ban on naked short-selling of stocks, sovereign bonds, and credit default swaps," Finance Ministry spokesman Martin Kotthaus said. "Only this way can destructive speculation be countered convincingly."

The European assault mirrors one by the U.S. Securities and Exchange Commission on September 19, 2008, four days after Lehman Brothers collapsed, to temporarily ban short selling in 799 banks and other financial institutions.

The U.S. move was of questionable value, according to several academic studies. While share borrowing fell during the three-week ban, financial stocks continued to plummet.

"In 2008 we already saw that such a measure doesn't work.. its a temporary patching up measure for a problem that needs still be resolved," said IG Markets strategist Soledad Pellon in Madrid.

[Source: By James Regan and Ian Simpson, Reuters, Paris and Milan, 12Aug11]

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