Traders are predicting chaos on the world's second-largest government bond market after the German authorities on Tuesday announced a ban on all naked short-selling in European public debt, as well as shares in the country's 10 largest financial institutions.
The unprecedented step saw the euro sink to a four-year low after Germany said that from midnight shorting of credit default swaps of any European government would be banned. The prohibition is an attempt to counter speculators that Berlin believes are trying to destabilise the region's sovereign bond market.
Traders greeted the move by BaFin, the German regulator, with a mixture of anger and astonishment. One bond trader said he expected Wednesday's trading session to be one of the most volatile in living memory: "It will be complete chaos, I really don't know what the Germans think they are doing."
One immediate effect was that the cost of insuring European government debt fell as markets were hit by a so-called "short squeeze" where investors with short positions are forced to offload their holdings and buy the bonds, causing the price to increase.
This is certain to please the German authorities, who have waged an increasingly hostile war of words with supposed speculators.
No immediate reasoning was given for ban, which will also prohibit the naked short-selling of shares in major German financial institutions, understood to include insurer Allianz and Deutsche Bank.
Traders warned that the measures could lead to an immediate backlash from investors around the world, adding that the ban was likely to be effectively unenforceable. It will not stop traders from shorting the bonds and shares using other European markets.
More: Market chaos warning after German ban on shorting - Telegraph
The unprecedented step saw the euro sink to a four-year low after Germany said that from midnight shorting of credit default swaps of any European government would be banned. The prohibition is an attempt to counter speculators that Berlin believes are trying to destabilise the region's sovereign bond market.
Traders greeted the move by BaFin, the German regulator, with a mixture of anger and astonishment. One bond trader said he expected Wednesday's trading session to be one of the most volatile in living memory: "It will be complete chaos, I really don't know what the Germans think they are doing."
One immediate effect was that the cost of insuring European government debt fell as markets were hit by a so-called "short squeeze" where investors with short positions are forced to offload their holdings and buy the bonds, causing the price to increase.
This is certain to please the German authorities, who have waged an increasingly hostile war of words with supposed speculators.
No immediate reasoning was given for ban, which will also prohibit the naked short-selling of shares in major German financial institutions, understood to include insurer Allianz and Deutsche Bank.
Traders warned that the measures could lead to an immediate backlash from investors around the world, adding that the ban was likely to be effectively unenforceable. It will not stop traders from shorting the bonds and shares using other European markets.
More: Market chaos warning after German ban on shorting - Telegraph
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