The European Union has banned, starting Friday, short-selling on the stock exchanges in four countries, to strengthen confidence in the markets affected by rumors in recent days and increased credit costs, announced Reuters.
Details vary from country to country: France, Italy, Spain and Belgium, it said in a statement on Thursday evening by the European Securities and Markets Authority, ESMA.
European markets have reacted many times in the last year to the rumors concerning the financial situation and the financing needs of countries with large debts in the euro zone. In recent days, speculation about some of the largest European banks have led to sharp movements in the markets, wiping billions of euros in market value of credit institutions.
The stock index of European banks fell by 37% since February, when it peaked this year and reached the minimum of the last 28 months on Thursday. The index has lost 17% in August.
Experts in the financial industry and academics question the effectiveness of banning the short selling.
“It is a measure which politicians take when they do not have any other weapon in their arsenal. It only pours sand in the ears of the world market and to signal to the world that leaders have no idea what it happens” comments James Angel, associate professor specialized in financial market regulation at the McDonough School of Business at Georgetown University in Washington DC.
ESMA notes that so-called short-selling type of transaction, combined with market reaction to rumors give rise to a “clearly abusive strategy”.
“Today, some authorities have decided to impose or extend a ban on short selling. They took this measure to restrict benefits gained from spreading false rumors and to reach a uniform regulatory environment”, it said in the European agency announcement.
In a transaction of this type, a trader sells borrowed shares hoping that their value will fall before having to buy for their return. The price difference is his profit. Critics say such practices encourage speculation and the share price falls, causing a panic that feeds on itself, while supporters consider that it preserves correctness and maintains liquidity.
France decided to ban short-selling on 11 shares for 15 days. Spain will protect 16 shares, for 15 days as well. Belgium has banned it in four transactions indefinitely, while details of the measure taken by the Italian authorities are not yet available.
BNP Paribas, Societe Generale, Santander and BBVA are among the banks included on the protected share lists.