THE European Parliament and EU executive are pushing to fast-track powers to ban short-selling of government debt by early 2011.
Senior officials in the European Commission, which is scrambling to contain spiralling borrowing costs for countries like Ireland and Portugal, believe the option to ban would prevent speculators from aggravating such problems.
Michel Barnier, the commissioner in charge of financial reform, will address banning powers when he meets economy and finance ministers in early December, an EU official said.
"If you have a mechanism in place, you would be better placed to act," said the official, adding that giving a new European watchdog the authority to ban would calm markets. "We are convinced it makes sense to give ... this possibility."
Barnier is pushing member countries to keep pace with the European Parliament, which has an equal say in writing the banning powers into law and wants to finalise its version of the legislation in February.
Both Barnier and the parliament want to grant the legal firepower to a new European markets policing agency in Paris to stop short-selling in an emergency.
But the UK is likely to resist any move amid concerns that it could raise borrowing costs.
The European Markets and Securities Authority, which will open its doors in January, could ban short-selling of credit default swaps (CDS).
CDS prices for Irish and Spanish banks and state bonds spiked on Friday, but with few actual bonds changing hands – a CDS covers a bond default – this points to growing trading by speculators.
The debate over banning such short-selling has opened a rift between the UK and countries such as Germany and France, which favour beefing up powers to rein in traders.
London is concerned that plans for bans could rattle markets in a similar way to Germany's recent drive to make private lenders shoulder some of the cost of a country's insolvency, a proposal the Irish prime minister blamed for forcing Dublin to seek International Monetary Fund help.
Conservative MEP Syed Kamell expressed worries that any bans could drive up the price of servicing debts.
"What signal does it send if we suddenly ban short-selling of CDS?," said Kamell, who will play a role in deciding parliament's position.
"There is definitely a concern that the unintended consequence of this would be to make debt more expensive. I don't think this is a concern in Britain only."
City A.M. Reporter