German shorts

Germany normally a solid,safe bet managed to panic the financial markets on Wednesday. Why? Should a ban on naked short selling of some long-term debt really cause such concern? Is it,in fact,an unfair restriction on normal market activity,which shows that German authorities are panicked? In a word,no. Remember: this isnt ordinary short selling were talking about,in which you borrow shares,then sell them,to be delivered at a later date; if by then the price has gone down,you make money,otherwise not. When thats the case,small groups cannot manipulate the market massively unless they risk a great deal of money. Naked short selling,however,is different: the shares are sold,but not borrowed resulting in what is known as a fail to deliver. That sort of behaviour,at moments of crisis,means a small group of investors could move market sentiment,bringing down companies. On Wall Street,post-Lehman,it was banned.

So Germany moved to correct a loophole in how crises play out in markets,in which the incentives in betting on default,or a worsening crisis,are exaggerated,and that creates a dangerous downward spiral. Why,then,the concern? For two reasons. First,the belief,not justified,that this is in preparation for an inevitable default. If theres another reason,its to create German domestic support for a bailout. And,second,because this ban alone will not be effective unless matched in London,where much such speculation occurs and where a new and untried government might not yet have the sophistication to catch on,and probably wouldnt anyway,for ideological reasons.

Nevertheless,the exaggerated reaction teaches us how deep the fears run for eurozone stability. That Europes recovery from the crisis is most fraught,for structural reasons,is not in doubt. Nor that this presages a further eclipse for that continent. That even Germany can set off a panic shows how far things have come.