Merkel declares war on the speculators

GERMAN chancellor Angela Merkel declared war on speculators yesterday, just hours after she threw world markets into turmoil by announcing a ban on short selling.

Merkel told the Bundestag: “This challenge is existential and we have to rise to it. The euro is in danger. If we don’t deal with this danger, the consequences for us in Europe are incalculable.”

Stocks around the globe tumbled after Germany instituted a ban on the naked short selling of shares in the country’s top finance houses, including Deutsche Bank and Commerzbank, and Eurozone government debt until next March. Naked short selling involves selling a asset without owning it or having borrowed it from a third party broker.

In a bid to clamp down on trading activity blamed for exacerbating Greek and Spanish sovereign default fears, Berlin also banned the buying of credit default swaps (CDS) on Eurozone sovereign bonds other than for hedging positions.

The news took traders by surprise as Merkel previously agreed to act in tandem with other EU leaders.

Stuart Bennett, currency strategist at Crédit Agricole, said: “The German announcement came out of the blue, without warning, and there is major uncertainty about what this means, whether others will follow and how they will maintain this.”

Jim Reid, a strategist at Deutsche Bank, said: “Just when markets were slowly regaining some poise, yesterday saw a strange political announcement that sapped strength from a still-fragile market.”

In an indication of the serious difficulties Merkel faces in pushing Germany’s support for the €750bn (£645bn) Eurozone bailout fund through the Bundestag, analysts at Matrix Corporate Capital speculated on a break-up of the single currency.

Andrew Lim said the exit of Germany or France from the euro would cause a “massive capital crisis” for European banks. The resulting devaluation of the currency would push periphery countries including Greece and Portugal into technical default, Lim said, taking a 30 per cent “haircut” to banks’ positions in their sovereign debt. Lim identified BBVA, Santander and Barclays as being particularly at risk. BBVA shares fell 3.8 per cent, while Santander was down and Barclays lost 5.1 per cent.

Lim said Merkel’s measures placed more strain on the euro as shorting the currency was now the main way to express bearishness on the region.

● 5 November
George Papandreou’s new Greek government says the 2009 budget deficit will more than double to 12.7 per cent of GDP.

● 16 December
Standard & Poor’s cuts Greece’s rating by one notch, to BBB-plus from A-minus, saying its austerity plan will not work.

● 29 January
Spain announces plan to save €50bn (£43bn) including spending cuts totalling four per cent of GDP. The plan includes four per cent cuts in public sector pay.

● 11 April
Eurozone finance ministers prepare a €30bn aid mechanism for Greece.

● 22 April
Eurostat says Greece’s 2009 budget deficit was actually 13.6 per cent of GDP.

● 23 April
Papandreou asks for activation of EU/IMF aid.

● 10 May
Global policymakers install an emergency financial safety net worth about €750bn.

● 17 May
Germany says it is making plans to avert future crises.

● 19 May
France says it is not considering a ban on naked short-selling European debt.