Shares hit by German short-selling ban

Shares in Europe and Asia fell on Wednesday after a surprise move by Germany to ban some types of short-selling of financial products.

Analysts said Berlin’s move had led to uncertainty and had added to fears for Europe’s banks.

Key share indexes in London, Paris, Frankfurt lost between 2% and 3% while Japan’s Nikkei 225 closed 0.5% lower.

The euro hit another a four-year low against the dollar. It fell to below $1.215 before recovering to $1.219.

Analysts said comments by German chancellor Angela Merkel that the “current crisis” facing the euro was “the biggest test Europe has faced in decades” were doing nothing to help stop the euro’s falls.

Meanwhile oil fell to $68 a barrel, as concern over tighter financial regulation sparked a move away from riskier assets.

Lucrative

The German government has banned “naked” short-selling of euro-denominated government bonds and of shares in the country’s 10 most important financial institutions.

Short-sellers usually borrow shares, sell them, then buy them back when the stock falls and return them to the lender, keeping the difference in price.

“Naked” short selling occurs when a trader sells a financial instrument that has not yet been borrowed.

BBC business editor Robert Peston said the regulator saw a ban on the shorting of government bonds – or debt – as an attempt to stop “what it would see as mischievous bets by investors that the financial difficulties of the likes of Greece and Portugal will worsen”.

“It thinks that such bets are what force down the price of Greek and Portuguese government bonds, which then spook investors, and make it much more difficult and expensive for the likes of the Greek and Portuguese governments to borrow vital new money,” he added.

The German ban will run from 19 May to 31 March 2011. It will also apply to the use of credit derivatives to bet on a fall in the value of the debt of a eurozone government, unless the investor owns some of the relevant debt.

Credit default swaps are financial derivatives that provide insurance for losses if a borrower goes bankrupt, and have become a lucrative trading market.