Are European Regulators Just Going To Ban Everything And Take The Summer Off?

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So Europe’s going to ban short selling. Or not, whatever. Or, sure, yes. Since last time this happened it did such a great job of propping up equity prices.

But maybe propping up equity prices isn’t the point? It’s not hard to find European (or American) politicians who just think that short selling is immoral and should be punished by public flogging, whatever it does to equity prices. And given the likely explanation for the recent European financials selloff – worries that banks' balance sheets are stuffed with Italian government debt – maybe there’s something else going on here. Here's a comment that's sure to get some regulators' blood boiling:

"People are shorting banks as a way of shorting sovereign debt," Tom Vosa, head of markets economics, Europe at National Australia Bank, told CNBC Thursday. "What we are really seeing is the markets deciding they don't like the fiscal position in Europe."

As FT Alphaville points out today, CDS spreads on European sovereigns are widening even as bond yields are rallying – because of technical factors that can be summed up as “regulatory interference.” (ECB is buying the bonds and pushing yields down, while the CDS market is thinly traded given speculation about bans and such.) If you want to bet on European government credit declines, it’s becoming increasingly difficult to either short bonds or buy CDS – so you’re left shorting the stock of the banks that own the most of it.

Of course banning short sales of banks probably wouldn’t do much to prop up Italy – but it would make it more painful to express a negative view on Italian debt. Which seems to be what European regulators are after.

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