Short circuit

German shorting ban: Traders have found it easy to circumvent the curbs imposed by Germany on dealing in some shares, government bonds and credit default swaps. But if Berlin’s aim was to make investors fearful, it has certainly succeeded. What little remained of the feel-good factor from last week’s European Union bailout has been squandered.

The restrictions proposed by Germany’s Federal Financial Supervisory Authority look set to fail if the intention was to stamp out speculative activity. They could only work if other countries did the same. Thankfully, the immediate signs are that this is not happening. France’s economy minister, Christine Lagarde, played down any fears that her country would follow suit.

In the meantime, speculators can carry on making bets against the debt securities that Germany is trying to protect, simply by not trading with counterparties supervised by German financial regulator BaFin. So long as the ban remains a purely German affair, it will dampen speculation on euro zone government debt within Germany, but not much more.

That said, Germany's politicians needn’t feel that they have been totally ineffectual. The ban caused traders of sovereign credit default swaps in London to cover short positions early on Wednesday for fear that a Europe-wide ban was looming. That initially saw sovereign credit spreads contract. Greek CDS fell 89 basis points to 530 bps, according to Markit data. This small victory didn’t last long. Sovereign CDS spreads were quickly rising again as traders became more confident in their ability to short government debt. Greek CDS were soon back at around 600 bps.

Moreover, Berlin’s surprise intervention has been hugely damaging for sentiment, visible in weakness across the major equity indices. The more lasting damage will be in the form of a further erosion of trust between lawmakers and the debt markets they rely on to finance their countries’ deficits. Germany’s go-it-alone approach has exacerbated fears over a knee-jerk regulatory response to the current crisis. That undermines investors willingness to commit capital in markets that can become less liquid overnight because of shock policy moves. Last week Germany was the driving force behind a ¤750 billion bailout package to try to restore market confidence and ease volatility. With this week’s announcement, it has achieved the opposite.