EU preparing a possible clampdown on short selling and high income investment banking, it is claimed

News - Banking

Written by Ray Clancy

Thursday, 11 February 2010 09:14

European Union lawmakers are calling for a clampdown on speculators and short-selling ahead of a meeting next week between EU financial markets chief Michel Barnier and EU finance ministers to discuss the issue.

Finance ministers from the 27 country bloc will meet in Brussels on February 16 with a backdrop of intense pressure on the Euro, which dipped to an eight month low against the dollar, and financial market volatility that some blame on speculators.

The Euro’s fall, accompanied by a deepening debt and deficit crisis in Greece that threatens to spread to other Euro zone countries, has put the issue of short-selling and financial market betting firmly on the political agenda.

Barnier, the EU commissioner in charge of the internal market, is expected to be quizzed by German Finance Minister Wolfgang Schaueble and France’s Christine Lagarde about such speculation and asked how he could limit damaging speculation.

Barnier, who has said he will examine short-selling curbs, came under pressure from members of the European parliament earlier this week who want to see him enforce new restrictions and say they may introduce their own tighter measures.

According to Jean Paul Gauzes, a Conservative lawmaker with close links to Barnier, said that he could amend and tighten hedge-fund rules now working their way through the European assembly.

‘I am going to try to introduce a ban on naked short selling for alternative investment funds. I am in favour of asking the Commission to come up with proposals, but there is nothing to stop us doing it already,’ he explained.

His views were echoed by Wolf Klinz, a prominent German liberal who chairs a committee on the financial crisis. ‘I cannot see any economic benefit in naked short selling, selling shares that you do not own. Where you cannot see any specific economic benefit in something, then it should be banned,’ he said.

‘It creates incentives to push down the price of a share and results in distortions. It should be forbidden and the same goes for any other type of similar speculation,’ he added.

Robert Goebbels, an influential socialist who will help craft parliament’s version of the new hedge fund rules, drew the comparison between such speculation and a ‘deliberate attack on the Euro,’ a view shared by some officials. ‘Naked short selling is disastrous. It is what was behind the fall of Lehman Brothers. It’s immoral,’ he declared.

The stern tone taken by parliament is likely to put pressure on Barnier and the Commission, the executive that proposes EU laws, to tighten oversight in the months ahead.

Earlier this year, Barnier laid down a tough regulatory agenda for his five year term that could see high income investment banking shrink as bankers are urged to focus on no-frills lending to households and businesses.

Barnier wants to push through tighter policing of banking, which may extend to curbing short-selling when an investor borrows shares and sells them in the hope the price will fall and he can repay the lender with stock bought for less later.

The British government temporarily outlawed the practice when its big banks, already on the brink of collapse, were further undermined by short-sellers at the peak of the economic crisis.