Germany clamp downs on speculative trading, euro slides

19th May 2010, Comments 0 comments

Germany clamped down on speculative trading, introducing new rules Wednesday in a bid to ease the market volatility it says threatens the eurozone economies.

Germany's securities market regulator Bafin banned naked short sales of certain securities, in particular the government bonds of the 16 countries that use the euro, from midnight Tuesday (2200 GMT).

But the euro continued to fall on the world's currency markets, with some traders saying the German move had accelerated the trend.

Naked short selling is when an investor sells on the market a security they do not own and have not even borrowed, hoping to be able to buy it later in the day at a lower price, thereby earning a profit.

"The extraordinary volatility of the bonds of eurozone states" justified the ban on short selling said a statement from Bafin.

Given current market conditions, "new excessive price variations could harm many on the financial markets and threaten the stability of the whole financial system," said the statement.

In addition to eurozone government bonds, the ban also applies to certain credit default swaps and on the shares of 10 financial institutions, and will be in force until March 31 next year.

Short selling has been repeatedly implicated in quick drops in markets, and its use has been limited or banned during the financial crisis on major exchanges.

The euro however, kept falling.

In New York, the it fell further against the dollar Tuesday, fetching 1.2206 dollars at 2100 GMT after sinking to 1.2162 dollars, its lowest level since April 17, 2006 in New York trading.

And in Tokyo Wednesday, it was changing hands at 1.2144 dollars in early trade, a new four-low against the dollar.

"Reports on restrictions on the financial markets always work as the negative factor to the relevant currency," said Daisuke Karakama, senior market economist at Mizuho Corporate Bank, echoing comments from US traders.

Greek officials say speculative trading played a major part in provoking their debt crisis.

Athens was eventually forced to accept a 110-billion-euro (134-billion-dollar) bailout from the European Union and the International Monetary Fund earlier this month.

When that failed to calm investors' fears that the Greek crisis could spread to other heavily indebted eurozone members, the EU and IMF were forced to put together a 750-billion-euro fund.

In Brussels meanwhile, EU finance ministers on Tuesday moved towards tighter curbs on the trillion-dollar hedge fund industry, widely blamed for speculative financial attacks, in particular on currencies.

They agreed on talks with the European parliament to standardise hedge fund regulation across the 27-nation bloc, despite opposition from Britain, which hosts 80 percent of Europe's share of the lucrative industry.

German Chancellor Angela Merkel said Tuesday that she would also push for an international tax on financial markets during next month's summit of leaders of the G20 group of leading developed and emerging economies.

European Commission chief Jose Manuel Barroso last week urged G20 leaders to back an international tax on financial institutions at the G20 summit on June 26 and 27 in Toronto.

In April, G20 finance ministers asked the IMF to look at taxing big banks to help cut risk and pay for any future financial failures.

But while Washington and Europe back the financial sector tax, Canada has led the opposition: its banks largely steered clear of crisis thanks to prudent risk taking.

IMF experts say the taxes must be coherent among all G20 members to prevent banks from avoiding them by moving operations to countries where the levies were not applied.

There was little comfort meanwhile from leading economist Nouriel Roubini, one of the few experts to predict the financial crisis.

"What's happening in Greece is just the tip of an iceberg of a broader range of sovereign debt issues, of deficit, in many advanced economies," he warned Tuesday.

The new crisis could occur "not just in the eurozone but UK, US, or Japan," he said in a speech at the London School of Economics.

© 2010 AFP

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