Germany's decision this week to ban speculative short selling of certain types of financial instruments has rattled financial markets around the world, further weakening the euro. The 16-nation currency, which has been battered by continuing concerns about the European debt crisis, fell to a four-year low on Wednesday. Although the euro bounced back slightly, analysts say comments by German Chancellor Angela Merkel, to justify the measure, only made matters worse.
World stock prices fell on Wednesday after Germany approved new regulations to limit speculative selling of euro-dominated government bonds.
Analyst Robert Halver of Germany's Baaderbank says the move caught many investors off guard. "For the markets right now, it is a shock because everybody is waiting to see what can come next because such a shocking effect, to do it overnight, is not good for a market which is keen on transparency," he said.
The ban applies to a type of transaction known as "naked short-selling." In regular short-selling, traders borrow assets and sell them at a set price, hoping they can make a profit by buying them later at a lower price. In naked short-selling, the bets are made on assets that are neither borrowed nor owned by the investor.
Investment strategist Dariusz Kowalczyk of CFC Seymour, Ltd. in Hong Kong. "In particular, speculators cannot sell them if they do not own them. And as a result, stock markets in the U.S. fell sharply because investors are afraid that there is more regulatory risk in the financial system. And whenever there is more risk, equity markets decline," he said.
Some economists blame speculative transactions such as "naked short selling" for plunging the world economy into a financial crisis. Similar investments against the euro are also blamed for pushing the European currency to its lowest level in four years.
In a speech before the German parliament, Chancellor Angela Merkel defended the new regulations on what she called "destructive" behavior by financial markets. "If the euro fails, then Europe fails. But if we are able to anticipate this danger, then the euro and Europe will be stronger than before," he said.
Analysts say the new regulations, aimed at maintaining financial stability in Europe, helped push the value of the euro to $1.21 before rebounding slightly. The euro has fallen more than 11 cents this month.