No, not liederhosen.<\/p>\n

The German government has announced that it will ban short-selling of 10 major financial institutions, government debt, and CDSs on government debt.\u00a0 It roughly parallels our three-week ban<\/a> on short-selling about 800 financials in the fall of 2008, and is likely to be about as effective<\/a>, pretty much like all short-selling bans throughout history.<\/p>\n

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.<\/p>\n

Short-sellers, as apparently has to be endlessly repeated, provide liquidity and more information<\/em> to the market than the long side alone can provide.\u00a0 The fact that this action will have to go to the options market<\/a> for satisfaction is likely to increase transaction costs.\u00a0 It may reduce naked short-selling, but it will also similarly increase transaction costs for those who are merely hedging, as well.<\/p>\n

Similarly, it’s like to decrease<\/em> the liquidity for Euro-zone government debt, raising interest rates; probably not the effect that the Germans are looking for here.\u00a0 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.<\/p>\n

Good move, Germany.
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