EU arm calls for joint action in aftermath of German bans

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EU arm calls for joint action in aftermath of German bans U.K. regulator says steps don't cover German institutions outside of GermanyRelated stories

By Polya Lesova, MarketWatch

FRANKFURT (MarketWatch) -- The European Commission called on Wednesday for coordinating regulatory actions across the union, a day after Germany unexpectedly banned naked short-selling of certain assets in a bid to reduce financial volatility.

Michel Barnier, the European Union's internal market commissioner, said he fully understood German and Austrian concerns about the impact of naked short-selling -- the practice of selling shares or other assets that aren't owned or borrowed.

Reuters

German Chancellor Angela Merkel delivers a government statement on the handling of the European debt crisis in the Bundestag lower house of parliament in Berlin May 19, 2010.



"These measures will be even more efficient if they are coordinated at the European level," Barnier said regarding the Germans' months-long ban.
"It is important that member states act together and that we design a European regime to avoid regulatory arbitrage and fragmentation both within the EU and globally," he said.
German Chancellor Angela Merkel on Wednesday called for Europe-wide rules, saying the euro is facing an "existential threat."
"If we don't avert this danger then the consequences for Europe are inevitable," Merkel said. "Because if the euro is failing, than Europe is failing."
Finance ministers are due to gather on Friday, yet already divisions are forming, with French Finance Minister Christine Lagarde saying her country doesn't plan to ban naked credit-default swaps, since it's a very narrow market, according to media reports.

And in the U.K., the Financial Services Authority said that Berlin's actions don't relate to branches of German institutions outside of Germany -- good news for Deutsche Bank /quotes/comstock/13*!db/quotes/nls/db (DB 60.20, +1.06, +1.79%) , whose main trading floor is based in London.

The measures announced by Germany late on Tuesday come as investors have been spooked by the high levels of sovereign debt in the euro zone and Greece in particular, triggering selloffs in European stocks, government bonds and the euro.

But the move rattled markets across the globe, sending the euro /quotes/comstock/21o!x:seurusd (CUR_EURUSD 1.2292, +0.0109, +0.8947%) plunging, commodities dropping and world stock markets falling.

Strategists at Deutsche Bank captured the mood in the markets: "Just when markets were slowly regaining some poise, yesterday saw a strange political announcement that sapped strength from a still fragile market."
The euro has since bounced off its worst level, trading at $1.2319 shortly ahead of the open of stock market trading on Wall Street. See Indications. The ban
Germany's Federal Financial Supervisory Authority, or BaFin, announced that it has prohibited so-called "naked" short-selling of some assets -- measures that will remain in force through March 31, 2011.

BaFin imposed several prohibitions, including on naked short selling in shares of 10 German financial institutions including Allianz SE /quotes/comstock/11e!falv (DE:ALV 83.78, -1.12, -1.32%) , Commerzbank AG /quotes/comstock/11e!fcbk (DE:CBK 6.07, +0.02, +0.28%) , Deutsche Bank /quotes/comstock/13*!db/quotes/nls/db (DB 60.20, +1.06, +1.79%) /quotes/comstock/11e!fdbk (DE:DBK 49.11, -0.89, -1.77%) and Deutsche Boerse AG /quotes/comstock/11e!fdb1 (DE:DB1 53.69, -1.89, -3.40%) . See analysis of impact on stock prices.

The regulators also banned naked short selling of euro-zone bonds and barred the purchase of credit-default swaps without possessing underlying security.
A CDS contract can be used as an insurance policy against the default of a bond or loan, but German regulators believe that speculators have been using CDS contracts to place bets on the creditworthiness of a country, thus triggering volatility and market disruption.
BaFin cited "the extraordinary volatility" in debt securities issued by euro-zone countries, adding that euro-zone CDS spreads have widened significantly. These "excessive price movements" could threaten the stability of the whole financial system, BaFin said.
Analysts meanwhile noted the decision comes as Germany's parliament debates its contribution to the 750 billion euro European Union-International Monetary Fund rescue plan.
"In view of getting parliamentary approval for the legal act covering Germany's 148 billion euro financial contribution to the 750 billion euro support package, the BaFin announcement seems likely to help to shore up support in the Bundesrat (upper house)," said analysts at Barclays Capital.

Polya Lesova is reporter for MarketWatch, based in Frankfurt.

NewMember

It sounds like a good move to stem out over speculation on sovereignty debts.  When there is a chance to make huge profit on some country's default, you bet some will chase this opportunity ruthlessly and only leave a messy behind them.  

If Greek is to stumble, let it be.  At this time, we don't want to give anybody the chance to push Greek down the cliff so they can rake in big bucks.