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Source: UOBAM

Equity markets appeared to be stabilising last week with the €750 billion rescue package announced for the peripheral Eurozone economies but the unexpected ban on short selling by the German authorities has resulted in another hit to investor confidence. The ban, announced on 18 May, restricts:

• Short selling of European government bonds listed on German domestic exchanges
• Naked credit default swaps (CDS) on European government bonds ( i.e. trading the CDSs if you do not own the bonds)
• Short selling of 10 German financial stocks

The actual impact of the ban is likely to be limited as the restriction is only effective in Germany while the securities and CDS contracts are traded on other markets outside Germany.

One reason why the short selling announcement was received negatively by the market was because it was a unilateral move by Germany. This signaled to the market that Eurozone policymakers are not coordinated in their policy response – something which the market is clearly looking for at the moment.

The strong disgruntlement of the German public over the bailing out of the peripheral economies is another risk for the market.

The inclusion of 10 German financial stocks also led to speculation that the German banks may suffer losses from their holdings of Greece, Italy, Ireland, Spain and Portugal government bonds.

While the rescue package takes care of the liquidity problem i.e. the governments of Greece, Italy, Ireland, Spain and Portugal will be able to roll over their debt over the next two years, it does not solve the solvency issue and some of the debt, in particular Greece’s, may eventually need to be restructured. German banks, together with French banks, have the largest exposure to the government bonds of the peripheral Eurozone countries.

About the Author

Ivan Guan is the author of the popular book "FIRE Your Retirement". He is an independent financial adviser with more than a decade of knowledge and experience in providing financial advisory services to both individuals and businesses. He specializes in investment planning and portfolio management for early retirement. His blog provides practical financial tips, strategies and resources to help people achieve financial freedom. Follow his Telegram Channel to join the FIRE community.
The views and opinions expressed in this article are those of the author. This does not reflect the official position of any agency, organization, employer or company. Refer to full disclaimers here.

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