German Shorts

No, not liederhosen.

The German government has announced that it will ban short-selling of 10 major financial institutions, government debt, and CDSs on government debt.  It roughly parallels our three-week ban on short-selling about 800 financials in the fall of 2008, and is likely to be about as effective, pretty much like all short-selling bans throughout history.

It’s already had the effect of appearing more like panic than prudence, driving the Euro down over a penny against the Dollar today, since the announcement, and probably increasing short interest today in all three areas it seeks to shore up.

Short-sellers, as apparently has to be endlessly repeated, provide liquidity and more information to the market than the long side alone can provide.  The fact that this action will have to go to the options market for satisfaction is likely to increase transaction costs.  It may reduce naked short-selling, but it will also similarly increase transaction costs for those who are merely hedging, as well.

Similarly, it’s like to decrease the liquidity for Euro-zone government debt, raising interest rates; probably not the effect that the Germans are looking for here.  And remember, being short the CDS means being the counter-party for someone who’s looking to parcel out some of the risk, which takes even more liquidity off the table.

Good move, Germany.

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