Germany steps up battle for financial market regulation

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Germany is stepping up its fight against financial market speculation and wants the world to know it.

After outlawing certain kinds of trading, Berlin wants to rally European partners to a united stance on financial market taxation before the next G20 summit.

Starting on Wednesday, so-called naked short sales of eurozone government bonds, some credit default swaps (CDS) that act as insurance on such bonds and on the shares of 10 financial institutions have been banned on German markets.

The measure is to remain in effect until March 31, 2011.

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

The process has been accused of fuelling speculation against banks or countries perceived to have weak finances, and can make the target's situation even worse.

Germany's financial market regulator Bafin underscored "the extraordinary volatility of the bonds of eurozone states" as a key reason for its move.

In such a context, large-scale short sales could "threaten the stability of the whole financial system," a Bafin statement added.

The risk was "concrete and immediate," Bafin president Jochen Sanio told German lawmakers on Wednesday.

Global financial markets reacted sharply to the German ban, with stocks in the United States, Asia and Europe posting losses and the euro hitting a fresh four-year low of less than 1.22 dollars.

"Markets concluded it was a desperate gesture and that the debt crisis in Europe could get even worse," Commerzbank analysts wrote in a research note.

The move is nonetheless essentially symbolic as long as it remains an isolated decision, because most of the European trading concerned takes place in London, Merck Finck analyst Konrad Becker told AFP.

And subsidiaries of German companies there are not concerned by the move, Britain's Financial Services Authority said.

Pan-European coordination is needed for greater effectiveness, said Michel Barnier, European commissioner for the internal market and financial services.

He said it would be "useful" to discuss the issue at a meeting of eurozone finance ministers scheduled for Friday in Brussels.

French Finance Minister Christine Lagarde expressed reservations over the German decision and regretted that Berlin had not consulted the "countries concerned."

Berlin's warning shot was dictated by domestic politics, newspapers and analysts said.

Chancellor Angela Merkel's government has promised to take action on financial regulation ahead a summit of the G20 group of developed and developing countries next month in Toronto.

Merkel might also be trying to improve her image at home, with many Germans against paying for European countries that they feel have taken lax or corrupt attitudes towards public spending, observers said.

On Wednesday, Merkel argued in front of German lawmakers for approval of the country's participation in a European rescue package aimed at underpinning borrowing conditions for troubled eurozone countries like Greece, Portugal and Spain.

The bailout has met stiff opposition in Germany, which is the biggest eurozone economy and would have to contribute up to 150 billion euros (180 billion dollars).

Merkel also said Germany would try to get international approval for the principle of a financial sector tax at the G20 summit.

Faced with reticence on the part of Anglo-Saxon countries however, the chances of an international agreement at the G20 meeting are "not especially high," Finance Minister Wolfgang Schaeuble told German television on Tuesday. Merkel said Wednesday: "If we do not obtain an accord there ... we will take up the organisation of a contribution from the financial sector at the European level, so people have a feeling of some justice."

© 2010 AFP

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