PARIS/MADRID - A ban on short-selling financial stocks in four European countries including France takes effect on Friday, a coordinated attempt to restore confidence in markets hit by rumors and higher borrowing costs.
France, Italy, Spain and Belgium imposed the ban, which will vary in detail depending on the country, the European Securities and Markets Authority (EMSA) said in a statement late on Thursday.
European markets have repeatedly moved on rumors about the health and funding needs of indebted euro zone governments, and more recently on some of its major banks, which have sent shares tumbling.
The DJ Stoxx index of European banking stocks has fallen 37 percent from a peak in February and touched a 28-month low on Thursday. The index is down 17 percent in August alone.
Financial industry participants and academics questioned the value of the short-selling bans.
It's one of those things that politicians grasp for when they have no other tools left in their arsenal, said James Angel, an associate professor specializing in financial market regulation at Georgetown University's McDonough School of Business in Washington DC.
All it really does is kick sand in the ears of the market and signals to the world that the leaders are clueless as to what's going on.
Stock futures pointed to a firmer open for European markets on Friday, with France's CAC 40 futures up 0.4 percent, lagging a 1 percent gain for the pan-European Eurostoxx 50 futures.
European regulators had previously played down the idea of a blanket ban on short-selling, through which an investor borrows shares and sells them on the expectation their price will fall and they can be bought back at a lower price.
EMSA said short-selling combined with rumor-mongering created a strategy that was clearly abusive.
Today some authorities have decided to impose or extend existing short-selling bans in their respective countries, it said. 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.
France will ban short selling on 11 financial stocks for 15 days, Spain will protect 16 stocks for 15 days, while Belgium will ban short selling of four financial stocks for an indefinite period. Details of the Italian ban were not immediately clear.
Banks on the list included France's BNP Paribas
French Finance Minister Francois Baroin said he welcomed the ban, while adding the country's banks were among the world's safest.
Investors should expect strong measures from France and Germany to address governance of the euro zone economy in the weeks ahead, after a meeting of President Nicolas Sarkozy and Chancellor Angela Merkel scheduled for next Tuesday, he added.
The Dutch regulator AFM said it did not see the need for a similar ban and had decided against it after consulting other European regulators.
The European assault mirrors one by the U.S. Securities and Exchange Commission on September 19, 2008, four days after Lehman Brothers collapsed, to temporarily ban short selling in 799 banks and other financial institutions.
The U.K. imposed a similar prohibition at that time.
The U.S. move was of questionable value, according to several academic studies. While share borrowing fell during the three-week ban, financial stocks continued to plummet.
If you talk to people who understand the technology of markets, including regulators, it's the general consensus that banning short-sales doesn't achieve the stated objectives, said Nicholas de Boursac, chief executive of the Asia Securities Industry and Financial Markets Association.
In Asia, South Korea banned short-selling in all listed stocks on Tuesday. It already had a rule in place prohibiting the shorting of financial stocks. Hong Kong is bringing in rules forcing investors to disclose short positions above a certain threshold to the market regulator.
Some hedge fund experts said the European ban would likely limit liquidity by shutting out some market participants.
For every short position there must be an equivalent purchase at some point. That's not the case if investors have to protect themselves by moving to cash -- there's then no imperative to buy, said Peter Douglas, chief executive of GFIA, a Singapore-based wealth manager and hedge fund consultant.
FRAGILE FRENCH BANKS?
The latest market turmoil focused on speculation about French banks, which are heavily exposed to European countries at the center of the region's debt crisis. Societe Generale, France's No. 2 lender, has especially been in the eye of the storm.
Those rumors sent shock waves through credit markets, pushing interbank borrowing rates higher and triggering a 3-month high of 4 billion euros in emergency overnight borrowing from the European Central Bank.
The turmoil drove up European banks' borrowing costs to levels not seen since the 2007-2009 global credit crisis and raised the question whether the difficulties may foretell a repeat of the crisis, when arteries of global finance seized up.
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 signals from Europe also set off alarm bells in Asia. Banking sources told Reuters on Thursday that one bank in the region had cut credit lines to major French lenders, while five others were reviewing trades and counterparty risk.
Bank of France Governor Christian Noyer said French banks were solid and would not be affected by the 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; Additional reporting by Judy McInnes, Jed Horowitz, Paritosh Bansal in NEW YORK and Rachel Armstrong in SINGAPORE; Editing by Martin Howell and Dean Yates)