The European Commission welcomed German and French calls for speedy measures to clamp down on speculators in government debt on Wednesday, though the likelihood of a bloc-wide ban still appears remote.
In a display of solidarity that may ease concerns over recent policy splits between the euro zone's top two economies, Berlin and Paris urged the Commission to consider an EU-wide ban on short selling of shares and sovereign bonds.
EU Internal Market Commissioner Michel Barnier has already said he will propose measures to curb short selling, such as greater transparency requirements, while national regulators have called for banning powers in times of extreme market volatility.
A Commission spokeswoman welcomed the sense of urgency expressed in the Franco-German letter but stopped short of promising to copy a unilateral ban on short selling of sovereign bonds and related derivatives that Germany implemented last month.
We do welcome the support reflected in the letter for our ideas, the spokeswoman said, adding that concrete proposals would be made during the summer.
The premium investors demand to hold 10-year Italian and other euro zone government bonds rather than German debt fell as investors sought to avoid being caught short if a ban were to be imposed on some sales of credit default swaps.
French Economy Minister Christine Lagarde told reporters in Paris on Wednesday that financial regulation was an imperative response to restore confidence in the markets.
In a joint letter published by Berlin on Wednesday, German Chancellor Angela Merkel and French President Nicolas Sarkozy told European Commission President Jose Manuel Barroso the EU executive needed to accelerate the pace of financial reform.
In particular we think it's imperative to improve the transparency of short-selling positions on shares and bonds, particularly sovereign bonds, the letter said.
The Commission should also look at the possibility of an EU-wide ban as introduced in Germany, it added.
Berlin moved in May to ban naked short selling -- in which the seller does not hold the underlying asset -- of shares in its biggest banks, euro government bonds and related credit default swaps.
Banks say the CDS market is far too small to influence debt prices and simply reflect government failure to cut deficits.
EU STATES SPLIT
Common pan-EU transparency requirements appear inevitable but so far there is no consensus on a German-style ban.
When Paris and Berlin cannot agree on issues like banning short selling, they call on Brussels to act. It is surprising the letter does not mention an economic (governance) agreement, another key subject that countries can't agree on, said one EU official.
National regulators in the EU are split over whether to copy the German ban but have indicated the need for powers to impose shortselling curbs in extreme market conditions.
Britain's Financial Services Authority, which polices Europe's biggest derivatives market, had no comment. Mark Hoban, a junior UK treasury minister, said last week any crackdown should be proportionate and evidence-based.
Lagarde said last week that France has no plans to copy Germany's ban on short selling of government debt but that supervisors should have powers to curb on market abuses.
In the joint letter, the two leaders said the Commission should also explore the possibility of harmonizing deadlines for the settlement and delivery of securities across the EU.
The securities industry is already looking at harmonizing settlement times across the EU. Most of Europe settles on the third day after a trade (T+3) but may eventually move to T+2, as in Germany.
The Association for Financial Markets in Europe (AFME), a banking lobby, said reducing settlement times was an ineffective way to curb shortselling.
Wednesday's announcement followed talk of strains in Franco-German relations, revived by a decision to postpone a scheduled summit on Monday.
Germany and France have been split on the future of the euro zone, with Berlin seeking to accelerate budgetary consolidation across the bloc to support the single currency and Paris hitherto warier of embarking upon swingeing austerity measures.
France's top priority is to create an economic government for the euro zone, with regular summits of the region's 16 leaders and a dedicated secretariat, to coordinate economic policy and focus on rebalancing the European economy and boosting growth.
On this front, however, Germany is so far unconvinced.
(Additional reporting by Huw Jones and George Matlock in London, John O'Donnell in Brussels and Yann Le Guernigou in Paris, editing by John Stonestreet/Ruth Pitchford)