European Countries Ban Short-selling

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(12.08.2011) Increased pressure against European banks, especially French banks, with increased borrowing costs has led four European countries to ban short-selling financial stocks.

By Kyrre Aamdal, Senior Economist at DNB Markets

The latest market turmoil focused on speculation about French banks, which are heavily exposed to European countries at the centre of the region's debt crisis. Societe Generale, France's No. 2 lender, has especially been in the eye of the storm. Those rumours sent shock waves through credit markets, pushing interbank borrowing rates higher and triggering a 3-month high of 4 billion euros in emergency overnight borrowing from the European Central Bank, according to Reuters. The turmoil drove up European banks' borrowing costs to levels not seen since the 2007-2009 global credit crisis and raised the question whether the difficulties may foretell a repeat of the crisis, when arteries of global finance seized up.
 
According to the European Securities and Markets Authority (EMSA) France, Italy, Spain and Belgium yesterday imposed a ban on short-selling financial stocks, taking effect on Friday. This is a coordinated attempt to restore confidence in a market hit by rumours and higher borrowing costs. France will ban short selling on 11 financial stocks for 15 days, Spain will protect 16 stocks for 15 days, while Belgium will ban short selling of four financial stocks for an indefinite period. Details of the Italian ban were not immediately clear. In Asia, South Korea banned short-selling in all listed stocks on Tuesday. It already had a rule in place prohibiting the shorting of financial stocks. Hong Kong is bringing in rules forcing investors to disclose short positions above a certain threshold to the market regulator. The European assault mirrors one by the U.S. Securities and Exchange Commission on Sept. 19, 2008, four days after Lehman Brothers collapsed, to temporarily ban short selling in 799 banks and other financial institutions.
 
Swedish core inflation, as measured by CPIF (constant mortgage interest rates) rose, from 1.5 per cent y/y in June to 1.6 per cent in July, as expected (Reuters). The Riksbank expected 1.7 per cent. Headline CPI also came in as expected and rose by 3.3 per cent y/y in July, up from 3.1 per cent in June. The Riksbank plans to hike twice during the remaining three interest rate meetings this year. We believe that they will confine themselves with one (if any), and today's figures somehow support this view, since actual inflation continues to be below the central bank’s expected inflation path. Nevertheless, recent financial turmoil and increased uncertainty regarding the global growth prospects are probably more important factors, should the Riksbank decide to deviate from the announced interest rate path. Furthermore key figures have abated over the last months signalling a cooling off of the economy.
 
Yesterday we had a new assessment in our monthly macro score. The macro score is a simple scorecard for the development in the key figures. The key figures are dispersed into eight different groups, four for households and four for businesses and we have one scorecard for each of seven countries. For instance will both the consumer confidence index (from CB) and Michigan University sentiment index belong to the household's sentiment group for the USA. In total we have 56 groups. Each group is given a score between -2 and +2. A 0 score reflects a development in the key figures that is associated with normal growth in the economy. This time we had nine downward adjustments and four upward adjustments. Three of the four upward adjustments were related to the recovery in Japan after the tsunami in March. This was the fourth month in a row with net negative adjustments. For Sweden household's sentiment, business sentiment and business production were all adjusted down, while exports had improved. For Norway we changed the score for the labour market from 1 to 0, the other groups were unchanged. An unweighted average for USA now stands at -0.75, the lowest score along with the UK. Norway is ranked No. one with a score at 0.5 followed by Sweden and the Euro Zone at 0.125.