Europe curbs short-selling as credit markets swoon
By Geert de Clercq and Paul Day
PARIS/MADRID | Thu Aug 11, 2011 8:29pm EDT
(Reuters) - European regulators will ban short-selling in four countries' financial stocks from Friday in a coordinated attempt to restore confidence in a panicky market hit by rumors and higher borrowing costs.
In a statement issued late on Thursday night, the European Securities and Markets Authority (EMSA) said Belgium, France, Italy and Spain were set to bring in the ban, which will vary in detail depending on the country.
But it's not clear to what extent the ban on short-selling will calm European markets that have repeatedly seized on rumors about the health and funding needs of euro zone governments, and more recently of some of its major banks.
There could also be questions about whether short sellers attention will just switch to other euro zone financial stocks that are not on the banned list.
"It's one of those things that politicians grasp for when they have no other tools left in their arsenal, and it's sort of a last ditch effort to do something," said James Angel, an associate professor specializing in financial market regulation at Georgetown University's McDonough School of Business in Washington DC.
"All it really does is kick sand in the ears of the market and signals to the world that the leaders are clueless as to what's going on."
European regulators had previously played down the idea of a blanket ban on short-selling, through which an investor borrows shares and sells them on the expectation their price will fall and they can be bought back at a lower price.
But EMSA said on Thursday that short-selling combined with rumor-mongering created a strategy that was "clearly abusive."
"Today some authorities have decided to impose or extend existing short-selling bans in their respective countries," it said. "They have done so either to restrict the benefits that can be achieved from spreading false rumors or to achieve a regulatory level playing field."
France will ban short selling on 11 financial stocks for 15 days, Spain will protect 16 stocks for 15 days, while Belgium will ban short selling of four financial stocks for an indefinite period. Details of the Italian ban weren't immediately clear.
Banks on the list included France's BNP Paribas (BNPP.PA) and Societe Generale (SOGN.PA), and Spain's Santander (SAN.MC) and BBVA (BBVA.MC).
The European assault on short sellers is similar to one by the U.S. Securities and Exchange Commission on September 19, 2008, four days after Lehman Brothers collapsed, to temporarily ban short selling in 799 banks and other financial institutions "to protect the integrity and quality of the securities market and strengthen investor confidence."
The U.K. imposed a similar prohibition at that time.
The U.S. move was of questionable value, according to several academic studies. While share borrowing fell during the three-week ban, the financial stocks continued to plummet.
It also raised philosophical issues about whether regulators should interfere with the free market and the rights of investors to hedge or speculate. The move was also criticized by at least one former SEC official as a political decision rather than one based on evidence.
FRAGILE FRENCH BANKS?
The latest market turmoil focused on speculation about problems at French banks, which are heavily exposed to the European countries at the center of the region's debt crisis. Societe Generale (SOGN.PA), France's No. 2 lender, was in the eye of the storm.
Those rumors sent shock waves through credit markets, pushing interbank borrowing rates higher and triggering a 3-month high of 4 billion euros in emergency overnight borrowing from the European Central Bank.
The turmoil drove up European banks' borrowing costs to levels not seen since the 2007-2009 global credit crisis and raised the question whether the current difficulties may foretell a repeat of the crisis, when vital arteries of global finance seized up.
"With banking rumors surfacing yesterday, it feels like the run-up to Lehman's collapse, where banks don't trust each other," said Commerzbank rate strategist Christoph Rieger.
The signals from Europe also set off alarm bells in Asia. Banking sources told Reuters that one bank in the region had cut credit lines to major French lenders, while five others were reviewing trades and counterparty risk.
Investors saw the latest loss of confidence as a sign that few of the problems that brought bank lending screeching to a halt last time around have really gone away.
"The market is already broken. It has never fully recovered anyway from 2008. Liquidity comes in fits and starts, and risk appetite in the banks is understandably very modest," said Stephen Snowden, fixed income manager at Aegon Asset Management.
Bank of France Governor Christian Noyer said French banks were solid and that their solidity would not be affected by recent market turmoil.
"Their capital levels, boosted by strong equity capital, are adequate, and their medium- to long-term financing programs are being carried out in perfectly satisfactory conditions," Noyer said in a statement.
By Geert de Clercq and Paul Day
PARIS/MADRID | Thu Aug 11, 2011 8:29pm EDT
(Reuters) - European regulators will ban short-selling in four countries' financial stocks from Friday in a coordinated attempt to restore confidence in a panicky market hit by rumors and higher borrowing costs.
In a statement issued late on Thursday night, the European Securities and Markets Authority (EMSA) said Belgium, France, Italy and Spain were set to bring in the ban, which will vary in detail depending on the country.
But it's not clear to what extent the ban on short-selling will calm European markets that have repeatedly seized on rumors about the health and funding needs of euro zone governments, and more recently of some of its major banks.
There could also be questions about whether short sellers attention will just switch to other euro zone financial stocks that are not on the banned list.
"It's one of those things that politicians grasp for when they have no other tools left in their arsenal, and it's sort of a last ditch effort to do something," said James Angel, an associate professor specializing in financial market regulation at Georgetown University's McDonough School of Business in Washington DC.
"All it really does is kick sand in the ears of the market and signals to the world that the leaders are clueless as to what's going on."
European regulators had previously played down the idea of a blanket ban on short-selling, through which an investor borrows shares and sells them on the expectation their price will fall and they can be bought back at a lower price.
But EMSA said on Thursday that short-selling combined with rumor-mongering created a strategy that was "clearly abusive."
"Today some authorities have decided to impose or extend existing short-selling bans in their respective countries," it said. "They have done so either to restrict the benefits that can be achieved from spreading false rumors or to achieve a regulatory level playing field."
France will ban short selling on 11 financial stocks for 15 days, Spain will protect 16 stocks for 15 days, while Belgium will ban short selling of four financial stocks for an indefinite period. Details of the Italian ban weren't immediately clear.
Banks on the list included France's BNP Paribas (BNPP.PA) and Societe Generale (SOGN.PA), and Spain's Santander (SAN.MC) and BBVA (BBVA.MC).
The European assault on short sellers is similar to one by the U.S. Securities and Exchange Commission on September 19, 2008, four days after Lehman Brothers collapsed, to temporarily ban short selling in 799 banks and other financial institutions "to protect the integrity and quality of the securities market and strengthen investor confidence."
The U.K. imposed a similar prohibition at that time.
The U.S. move was of questionable value, according to several academic studies. While share borrowing fell during the three-week ban, the financial stocks continued to plummet.
It also raised philosophical issues about whether regulators should interfere with the free market and the rights of investors to hedge or speculate. The move was also criticized by at least one former SEC official as a political decision rather than one based on evidence.
FRAGILE FRENCH BANKS?
The latest market turmoil focused on speculation about problems at French banks, which are heavily exposed to the European countries at the center of the region's debt crisis. Societe Generale (SOGN.PA), France's No. 2 lender, was in the eye of the storm.
Those rumors sent shock waves through credit markets, pushing interbank borrowing rates higher and triggering a 3-month high of 4 billion euros in emergency overnight borrowing from the European Central Bank.
The turmoil drove up European banks' borrowing costs to levels not seen since the 2007-2009 global credit crisis and raised the question whether the current difficulties may foretell a repeat of the crisis, when vital arteries of global finance seized up.
"With banking rumors surfacing yesterday, it feels like the run-up to Lehman's collapse, where banks don't trust each other," said Commerzbank rate strategist Christoph Rieger.
The signals from Europe also set off alarm bells in Asia. Banking sources told Reuters that one bank in the region had cut credit lines to major French lenders, while five others were reviewing trades and counterparty risk.
Investors saw the latest loss of confidence as a sign that few of the problems that brought bank lending screeching to a halt last time around have really gone away.
"The market is already broken. It has never fully recovered anyway from 2008. Liquidity comes in fits and starts, and risk appetite in the banks is understandably very modest," said Stephen Snowden, fixed income manager at Aegon Asset Management.
Bank of France Governor Christian Noyer said French banks were solid and that their solidity would not be affected by recent market turmoil.
"Their capital levels, boosted by strong equity capital, are adequate, and their medium- to long-term financing programs are being carried out in perfectly satisfactory conditions," Noyer said in a statement.