European regulators will ban short-selling in four countries' financial stocks from Friday in a coordinated effort to restore confidence in a market hit by rumors, higher borrowing costs and a steep rise in emergency financing.
In a statement issued close to the end of the day, the European Securities and Markets Authority (EMSA) said Belgium, France, Italy and Spain were set to bring in the ban, which will vary in detail from country to country.
The announcement follows days of speculation about the health of French banks, which are heavily exposed to the European countries at the center of the region's debt crisis.
"While short-selling can be a valid trading strategy, when used in combination with spreading false market rumors this is clearly abusive," EMSA said in a statement.
"Today some authorities have decided to impose or extend existing short-selling bans in their respective countries. They have done so either to restrict the benefits that can be achieved from spreading false rumors or to achieve a regulatory level playing field."
The statement was soon followed by specific announcements from financial regulators in at least three of the countries. France and Spain will ban short selling on financial stocks for 15 days, and Belgium will ban short selling of four financial stocks for an indefinite period. The details of the Italian ban weren't immediately clear.
The concern about the French banks had sent shock waves through credit markets, pushing interbank borrowing rates higher and triggering a three month high of four billion euros in emergency overnight borrowing from the European Central Bank.
"With banking rumors surfacing yesterday, it feels like the run-up to Lehman's collapse, where banks don't trust each other," said Commerzbank rate strategist Christoph Rieger.
The three-month euro-dollar cross-currency basis, which reflects the premium for swapping euro Libor into dollar Libor, widened to as much as 95 basis points, up around 40 bps since the start of August.
The signals from Europe set off alarm bells in Asia. Banking sources told Reuters that one bank in the region had cut credit lines to major French lenders, while five others were reviewing trades and counterparty risk.
Investors saw the latest loss of confidence as a sign that few of the problems that brought bank lending screeching to a halt last time around have really gone away.
"The market is already broken. It has never fully recovered anyway from 2008. Liquidity comes in fits and starts, and risk appetite in the banks is understandably very modest," said Stephen Snowden, fixed income manager at Aegon Asset Management.
At the center of the storm was French bank Societe Generale, whose shares dropped 15 percent on Wednesday, only to climb 3.7 percent on Thursday in volume nearly three times the average over the past 90 days.
The European banks index was 3.9 percent higher, with BNP Paribas about flat, and Credit Agricole finishing up 5.1 percent.
Bank of France Governor Christian Noyer said French banks were solid and that their solidity would not be affected by recent market turmoil.
"Their capital levels, boosted by strong equity capital, are adequate, and their medium- to long-term financing programs are being carried out in perfectly satisfactory conditions," Noyer said in a statement.
(Writing by Janet Guttsman, editing by Martin Howell)