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German financial regulator declared a ban on naked short sales of euro zone bond and 10 financial stocks listed in Germany on late Tuesday after market closed. The ban will took effect from midnight Tuesday and it extends to uncovered credit-default swaps on euro-zone debt. The ban doesn’t cover business done outside Germany, so a Germany company doing business in USA will not come under its cover.
As a result of this ban the stocks were lower in Asia, Europe and the U.S. German bond prices surged and the yield on notes were at record low. Prices on the US treasuries were also trading higher. The cost of insuring European sovereign debt against default using credit-default swaps initially dropped sharply.
The German finance ministry said the German ban could be expanded to include naked short-selling of all German shares, stock derivatives, derivatives related to euro-zone government bonds and any euro currency derivatives that don’t have role in hedging against currency risks.

Euros future now depends on how the European debt problem affects the global share markets. It is very interesting to see that whether Germany’s step is followed by others in the euro zone. Though French finance minister said the France isn’t considering banning naked credit default swaps on sovereign debt. It is very narrow market and the sort of trading is not very active in France. But if others adopt similar financial regulations, that will complicate managing the risk of holding the currency, possibly weighing on the euro even more.
It is very important to discuss one matter that, after yesterday’s successful Irish Sovereign bond issue, 3 times oversubscribed to raise €1.5 bn, the Irish investment story appears to be moving back on track. With the Irish sovereign successfully attracting funding yesterday, the door for the Irish banking sector funding re-opens. One key funding in the un-guaranteed space by an Irish bank and we reach another milestone. The long march back from the crisis continues.

On the other places of the planet South Korea which has $270 billion foreign currency reserves, their central bank said that euro zone crisis make the euro less attractive as a reserve currency. Iran’s central bank chief said that country may rethink its reserve, which is close to $81 billion. Russia with $400 billion reserve, said that it shifted its mix of reserves away from the euro last year.
The European tension has its reflection on different area, like in London interbank offer rate , it rose 0.48% on Thursday, its highest level since last July. CBOE volatility index ( VIX ) jumped nearly 30% to it’s highest level since last year march.

It is very hard to say that whether German ban on short selling will affect in solving the debt problem, it would probably better if the ban comes from EU as a whole & not from a member. As a matter of fact ban would effect much if it comes from USA or U.K.
There were some rumors those are that ban was actually to do window dressing, may be to save a big German organization which is in trouble. Another rumor is that all those packages provided by other countries and EU organizations is to save not to Greece but indirectly to some big institutions from some big countries in Europe, who are invested in Greece.

The depreciation in value of EURO and as well as pumping of money into the economy by buying govt bonds of weak economies such as Greece, Portugal, Spain from the secondary market, these all things may create increase inflation rate &  for that ECB may consider increasing interest rate. Pumping money by ECB into economy for stabilizing the market means suppress the widening of yield spread of Greek, Spanish and Portuguese govt debt against the German govt debt. But will not suppressing symptoms without addressing the cause behind the widening in the spread can only make things much worse ?

It is good to see that after lot of depreciation EURO is again appreciating, in chart it looks like it the time now for reaction. Euro is trading around 1.2570 against $ in Saturday.

NOTE :  Please see the disclaimer of this blog .


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