Temporary short-sale ban in four European nations

Stephen Beard Aug 12, 2011

Temporary short-sale ban in four European nations

Stephen Beard Aug 12, 2011

JEREMY HOBOSN: Regulators in Belgium, France, Italy and Spain today did something that typically only gets done in a market crisis. They banned short-selling. In other words, they’re trying to limit losses by limiting the ability of investors to make money on falling stocks. For more on this, let’s bring in our European Correspondent Stephen Beard. He is live with us in London. Stephen, first of all, give us a little refresher on what short-selling is.

STEPHEN BEARD: Well, this is where speculators make money on falling stock prices — for example, they sell a share they don’t own and buy it back at a lower price and pocket the difference.

HOBSON: And why are these four European countries doing this — temporarily banning it?

BEARD: Well, this is a direct response to the very sharp falls in share prices this week, especially bank shares. You recall what happened to the big French bank Societe Generale. It fell by 20 percent at one point this week on rumors that the bank was in trouble, and on rumors that the French government would be stripped of its AAA credit rating. Both rumors were vehemently denied. There was believed to be some short-selling of bank shares at the time, so this ban, in the words of the Europe-wide regulatory body that’s coordinating it, will restrict the benefits that can be achieved from spreading false rumors.

HOBSON: But it’s not Europe-wide, right Stephen, it’s just these four countries?

BEARD: It is only four countries that agreed to the measure. The U.K., which is a big player here, it has the biggest financial center, did not agree — neither did the other 22 nations at the EU. And the U.S. has made it clear it will not impose a ban.

HOBSON: Stand-by, Stephen, I’m going to bring in Richard Hunter now, he is an analyst with Hargreaves Landsdowne investment firm in London. Richard, in your experience, does a short-sell ban like this work to calm the markets?

RICHARD HUNTER: There is very little evidence that it does work. If anything, it has the outcome of creating a false market, because what you’re essentially trying to do is limit what is already downward pressure and downward market sentiment, so if we look back at 2008 when the U.S. and U.K. did try it on financials, the drop in financial share prices was simply over a longer period of time.

HOBSON: So why would regulators do something like this then?

HUNTER: Well, as we just heard from Stephen, their thinking is quite simply that they are trying to limit the amount of profit that speculators could make. Set against that of course, you have to ask the question — has the horse already bolted? But certainly in terms of historical experience, there is no strong evidence that short-selling bans are anything more than an effort to calm markets.

HOBSON: Richard, what does this tell you about the size of the crisis that we’re in right now?

HUNTER: It’s very indicative of the fact that we are in a period of great uncertainty. This is a global thing of course, not just confined to Europe. It’s also recognition that the two main concerns at the moment are those words of debt and growth, and those are the real issues, rather than pinning down one particular sector.

HOBSON: Stephen Beard, let me go back to you quickly here — are we seeing any immediate effects in the markets from this ban?

BEARD: Not really. The big three European stock markets opened lower this morning and then recovered. More likely as a result of the firmer tone on Wall Street than this very limited ban on short-selling of bank shares.

HOBSON: Marketplace’s European Correspondent Stephen Beard — and Richard Hunter of the trading firm Hargreaves Landsdown in London. Thank you to you both for joining us.

HUNTER: Thank you.

BEARD: OK, Jeremy.

We’re here to help you navigate this changed world and economy.

Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.

In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.

Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.