Berlin/Rome: Germany may widen its ban on speculative financial trades to cover all shares, a leaked government document showed on Tuesday, as fears about the euro zone’s debt crisis sent stocks and the euro plunging further.
The finance ministry draft said planned measures aimed at stabilizing financial markets would include a “ban on naked short-selling of shares, including derivatives referring thereto.”
Berlin stunned markets last week by unilaterally suspending naked short-selling in euro sovereign bonds and credit default swaps as well as stocks in some financial companies.
Investor worries that the euro zone debt crisis may turn into a banking crisis drove European stocks and the euro sharply down on Tuesday while safe-haven German bonds hit a record high.
Highly indebted Italy was the latest euro zone country set to announce a two-year austerity plan worth $32 billion despite concern that Europe-wide retrenchment may harm global economic growth.
The pan-European stock index fell by as much as 3.4% at one point to a nine-month low, with banking stocks hardest hit on jitters over the Bank of Spain’s weekend takeover of a small savings bank, CajaSur, after a failed merger with another regional lender.
Spanish analysts said savings bank consolidation has been long planned as part of efforts to rationalize the sector.
However, markets worry that more troubles in southern Europe will have knock-on effects for larger euro zone banks, which are owed billions by public and private borrowers in the region. There are also worries about a lack of resolution for banks’ bad debts in the euro zone.
“The big challenge is to prevent the vicious circle, that means for example the crisis of the public sector turning into a banking crisis,” European Central Bank governing council member Ewald Nowotny told a Brussels conference.
The dollar, seen as a safe haven from Europe’s debt worries, gained 1% against euro and sterling. The euro briefly traded below $1.22, erasing most of the recovery from last week’s four-year low.
The global financial system is showing signs of increased stress, though still well short of the panic that followed the collapse of investment bank Lehman Brothers in September 2008.
The two-year US bond-swap spread, a key gauge of financial system stress, rose to fresh one year highs near 60 basis points, up from 51 bps on Monday. It reached 160 bps in the weeks after the Lehman crash.
“There is indeed a risk that, under market pressure, some countries overdo austerity,” Olivier Blanchard, chief economist of the International Monetary Fund, said in a newspaper interview. “That would be a mistake.”
European Union officials played down the risk of public spending cuts and revenue increases damaging economic recovery.
European Council President Herman Van Rompuy told a Brussels Economic Forum: “In the short term, the acceleration of fiscal consolidation will hamper growth in the euro zone as a whole only marginally.”