Tags:
Journalism of Courage
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.
