Eurozone debt crisis will take at least two to three years to mend, financial chief warns

The eurozone can conquer its crisis in the next few years if countries get their financial houses in order, according to the head of the bloc's rescue fund.

Germans in particular are too pessimistic about the region's outlook with newspaper headlines fanning panic, according to Klaus Regling, head of the European Financial Stability Facility (EFSF).

‘There is good reason to hope that the crisis is over in two to three years' time,’ he said, adding that this depends on member states continuing to implement reforms aimed at sorting out their budgets.

Regling dismissed the idea that the eurozone could break apart. Both weaker and stronger countries had a collective interest in seeing it survive, he said. ‘The risk that the euro is discarded, from whatever quarter, is zero,’ he said, criticising occasional ‘hysteria’ in Germany on this topic.

He said his fellow countrymen expected everything to get worse, but that this was the wrong attitude. ‘The signs point to an improvement,’ he said, adding that the economic fundamentals in euro zone countries appeared to be improving.

Meanwhile, Italy, France, Spain and Belgium have extended their short selling bans but hinted the curbs could be lifted by October. Spain and Italy said their bans would continue to September 30 while France's will remain in place until further notice.

Belgian regulator FSMA noted its ban on short selling has no end date but said it would assess lifting a ban on covered short-selling as soon as market conditions allow.

‘The extended bans are up for review by end of September,’ the European Securities and Markets Authority (ESMA), which helped to coordinate the announcements, said in a statement.

Greek regulator HCMC, which had introduced a ban earlier, said it too would review its curbs by the end of September. They are due to expire on 07 October.

Italy, Spain, Belgium and France introduced their bans on August 12 after the ESMA failed to forge a common approach among all the bloc's 27 member states.Italy's Consob regulator also announced it had extended the rules it introduced on July 10 regarding disclosure of short selling positions to October 14. Germany meanwhile quashed market rumours it too would broaden its long standing short selling restrictions.

Britain, the bloc's biggest stock market, refused to join the ban in August as did the Netherlands.
The four euro zone based countries imposed the ban to curb wild swings in stock markets, particularly in financial shares.
 
Short selling is a common way for hedge funds to bet on falling share prices, whereby traders borrow stocks to sell them in the hope of scooping them up later at a lower price. But the bans appear to have had limited success in stopping a slide in banking shares. Since August 12, the STOXX Europe 600 banking index .SX7P has fallen 7.5% after hitting a low for the year days after the bans were introduced. The broader European market is down about 3%.

‘Short selling was not the reason bank share prices were under pressure and banning it has not relieved that pressure,’ said Andrew Baker, chief executive of the Alternative Investment Management Association, a hedge fund lobby group.

Richard Payne, a finance academic at the Cass Business School in London, said this month restrictions on short-selling can do more harm than good by increasing volatility and bumping up trading costs.
The bans could be an attempt to deflect attention away from political failures to solve deeper economic issues, Payne said.

Banking stocks have suffered as investors fear more hits to lenders' holdings of eurozone sovereign debt, as the European Union finalises a second rescue of Greece after bailing out Portugal and Ireland too.

The EU and European Parliament are working on a draft law that would give ESMA greater coordination powers over short selling restrictions, aiming to avoid the patchwork of measures by member states since the collapse of Lehman Brothers in 2008.