FSA rejects ban on shorting as Europe's critics warn of dangers
Saturday 13 August 2011
The Financial Services Authority yesterday rejected the shock bans on short-selling financial stocks imposed by France and other European countries in a bid to quell market turmoil.
The watchdog believes falls in UK bank shares last week were caused by traditional long investors selling shares and not pressure exerted by short-sellers. As a result, the FSA yesterday ruled out joining France, Italy, Spain and Belgium, which announced on Thursday night they were outlawing shorting temporarily.
The FSA said: "We have an existing short-selling disclosure regime around financial stocks in place and we continue to monitor the activity in our markets accordingly. We have no current plans to introduce a short-selling ban."
Andrew Shrimpton, the FSA's head of hedge funds until 2007, said the regulator had learnt from the ineffectiveness of a ban that it did choose to implement during the credit crunch three years ago.
Mr Shrimpton, now a partner at the asset management consultants Kinetic, said: "We had looked at bringing in short-selling disclosures or bans before but we decided against it. In 2008 the political pressure became too great but the ban didn't work.
"You take liquidity out of the market if you can't short and an illiquid stock is more volatile than a liquid stock."
Short-sellers, usually hedge funds, borrow shares they do not own and sell them expecting the price to fall so they can buy them back more cheaply at a profit. Supporters of bans say that in fearful markets, short positions become self-fulfilling as traders spread scare stories to push down prices.
European bank shares rose yesterday on relief about the bans after a week of wild trading that saw the French banking giant Societé Generale tumble 15 per cent in one day.
SocGen was at the centre of fears about banks' exposures to troubled sovereign debt and lack of short-term funding that threatened to create a vicious downward spiral in confidence.
Shares in SocGen and Italy's Unicredit, which also suffered in Wednesday's rout, both rose 5.6 per cent.
Barclays was the biggest UK gainer, up by 5.3 per cent, while the FTSE 100 rose by 3 per cent. Markets in Europe also made gains. Still, market watchers said that the rushed bans would prove ineffective or make financial shares more volatile.
Barclays Capital analysts said: "European bank stocks, while bouncing back after a knee-jerk response in September 2008 when a short-selling ban was announced, dropped sharply over the next few months as the financial and economic crisis worsened."
Richard Small, a lawyer at Ashurst, said clients were scrambling to understand the different measures.
"Confusion is the best word I would use and that isn't good for the market. There is a question over harmonisation because, as usual, Europe is supposed to act as one and [the regulator] ESMA is eventually meant to harmonise everything but it's not able to yet."
French economy grinds to a standstill
*France's financial woes got even worse yesterday with official data showing that the country's economy has ground to a halt.
French economists had expected Insee, the State statistics agency, to announce GDP growth of 0.2 per cent for the three months to the end of June. But it said that the French economy had produced no growth at all over the quarter, with industrial production contracting sharply and consumer spending slowing.
François Baroin, the country's finance minister, said the disappointing figures partly reflected the shocks caused by Japan's earthquake and the Arab Spring. He insisted France would still hit its 2 per cent growth target this year,rising to 2.55 per cent in 2012.
However, economists warned those targets looked ambitious and also questioned whether France would now be able to meet its pledge to bring its deficit down to 3 per cent of GDP in 2013. Such worries will add to the speculation that France could be next to lose its AAA credit rating, which caused so much damage on the markets last week.
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