What were they thinking?
Things looked to be calming down in the eurozone, at least compared to earlier in the week. Greece had just received its first batch of bailout money.
The €8.5bn of ten-year bonds that kicked off all this fear in the first place will be repaid today. It’s the last redemption needed until March 2011, so the immediate threat of Greece defaulting has now passed.
It was hardly “all’s well that ends well.” But at least it looked like there might be a bit of breathing space coming up for Europe to focus on making all those ‘austerity’ packages work.
And then the German regulator decided to attack the evil speculators – and markets flew into a panic yet again…
Markets are panicking after Germany’s nasty surprise
Germany’s financial regulator BaFin sprung a nasty surprise on markets last night. After European markets had closed higher for the day, Germany announced a ban on short-selling certain financial stocks and also on betting against European government bonds using credit default swaps (CDS).
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Not only that, but the regulator decided the ban would be effective as of midnight last night.
It’s hard to see the thinking behind this. There may be a case for banning things like ‘naked’ shorting (where you sell shares short without borrowing them from someone in the first place). Others will argue the toss over CDS too. And there’s certainly a wider case for reform – increasing transparency in the markets, breaking up the banks, etc.
But to throw a completely unexpected regulatory grenade like this into the middle of a jittery market is just plain silly. Stock markets in the US plunged after having a reasonably calm day. Markets in Asia followed this morning, and so far today, Europe’s not looking too healthy either.
The euro tanked on the announcement as well, hitting a fresh four-year low against the dollar of below $1.22. After all, as Greg Gibbs of Royal Bank of Scotland told Bloomberg, “if you don’t feel you can sell bonds and equities in Europe, you’re left with selling the euro to express a negative view.”
But more importantly, this looks like panic. The first thing that investors think is – what do the Germans know that the rest of us don’t? Why are they protecting specific financial institutions? As Darren Fox, a regulatory lawyer at Simmons & Simmons told the newswire, the way the ban was announced “was very irresponsible and it’s sent many market participants into panic mode… Where is the market emergency that necessitates the introduction of an overnight ban?”
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The move also doesn’t concur with previous statements by BaFin. Two months ago, says Bloomberg, the regulator found “no evidence” of excessive speculation against Greek bonds using CDS. As Peter Thal Larsen points out on Breakingviews.com, a year ago, net outstanding CDS on Greek debt totalled $7.8bn. At the start of this month, the figure was just $7.7bn. “Hardly a speculative frenzy”.
What were they thinking?
So as we asked earlier – what were they thinking? Well, these people aren’t stupid. I’m not convinced that they don’t understand how markets work. The problem is, they’re caught between a rock and a hard place. On the one hand, they must realise that there are serious economic problems within the eurozone, and that these have nothing to do with the ‘speculators’ that they are now scapegoating.
But on the other, they are politicians. And they have voters to please, and factions within their own parties. And unquestionably, some of them are just anti-markets, and like the idea of ‘punishing’ speculators for the sake of it.
So this move is presumably driven more by politics than by a desire to improve the functioning of the financial markets. And that’s what really scares the markets right now. Investors were happy enough to “shake the hand of the government”, as Bill Gross of Pimco once put it, back in 2008. That’s when the government’s hand was holding a big wad of money to bail them all out.
But now it’s payback time. Governments are running out of bail-out money. We’re seeing stimulus packages turn into austerity packages. And taxpayers are rightly annoyed that financial institutions seem to have entirely avoided any increased regulation while still enjoying massive bonuses.
Markets are at the mercy of politicians
The trouble is that the sorts of reforms that need to be put in place are long-term in nature. But the voting cycle is short term. And that’s a recipe for ill-considered populist measures that do nothing, rather than a genuine improvement to the financial sector.
The markets are now waking up to the fact that they are at the mercy of policymakers across the world, from China to the US to Europe. And they don’t like that uncertainty. You can’t plan for the sort of intervention that BaFin made last night. But the move does make it a lot more likely that we’ll see more of this sort of thing.
We look at how to cope with volatility and political risk in the next issue of MoneyWeek (if you’re not already a subscriber, get your first three issues free here).
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As Europe struggles with its debt crisis, Doug Casey argues that Greece – and any other government – should default, and warns that we could soon see the ‘greatest changes to society since the Industrial Revolution’.