Forex News – European short-selling ban aims to lift market sentiment

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Forex Asia Review - Euro temporarily retreats from recent losses; Euro debt woes still persistFrance, Italy, Spain and Belgium imposed a ban on the short-selling of financial shares in an effort to allure investors back into a banking sector that has been pummelled in the past few days. The four countries decided to introduce the ban after a flurry of rumours knocked a third of the value off some European bank shares this month, particularly French bank shares.

Short selling is the borrowing shares and selling them in expectation the price will fall.

The ban improved market sentiment today, helping euro regain some losses although concerns over the health of French banks kept the mood edgy and trading remained volatile.

Traders said the measure would provide temporary relief to nervous investors, but euro zone debt woes and a grim outlook for the global economy are expected to keep markets fluctuating.

Short-selling bans have proven ineffective in the past, tend not to address the real underlying issues in Europe, reduce liquidity and increase the related risk premiums. A similar short-selling ban was imposed back at the beginning of the financial crisis in September 2008. Initially European bank stocks bounced up in a knee-jerk response but dropped sharply over the next few months as the financial and economic crisis worsened.