Will Merkel ban on short-selling, $1 trillion package save the eurozone?
The euro fell to a four-year low on Wednesday amid continued investor worries about Europe's sovereign debt woes. German Chancellor Angela Merkel banned naked short-selling, seeking to combine new regulation with an already announced $1 trillion euro rescue package, to shore up the currency.
A nearly $1 trillion rescue package cobbled together by the European Union (EU) and the International Monetary Fund in early May has so far done little to reassure investors that the Greece debt crisis won't spread – or that the euro currency is secure. Now, European leaders are signaling they may take further regulatory action to ease the pressure.Skip to next paragraph
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On Wednesday, the euro dropped to a four-year low against the dollar after German Chancellor Angela Merkel banned naked short-selling in her country and called for much stricter regulation of credit and equity markets across Europe. “The lack of rules and limits... lead to an existential threat to financial stability in Europe and even the world,” Ms. Merkel said at the start of a parliamentary debate on Germany's contribution to the bailout. “The market alone won’t correct these mistakes.”
Merkel is trying to stem public anger over Germany's financing of the rescue fund and a separate $140 billion bailout for heavily indebted Greece. Many Germans are asking why they should be responsible for the debts of other nations and for protecting the large private banks that lent the money in the first place.
Now Merkel and some other European leaders are targeting "speculators" – rather than over-borrowing and spending – as a reason why the region's credit markets remain gummed up.
Naked short selling occurs when an investor promises to deliver an asset at its current market price to another investor, effectively "selling" something he doesn't own in the hope that the price will decline quickly, allowing him to cover his trade and profit. Merkel's government also imposed new rules making it harder for investors to bet against eurozone sovereign debt.
Stocks across Europe fell on Wednesday, over both investor anger at the new German regulation and concern that sovereign defaults may still lie in Europe's future. While politicians and IMF officials had predicted that the promise of money for heavily indebted nations would sufficiently reassure investors, so that the money wouldn't need to be spent at all, that market reassurance has not yet been in evidence.
Many economist are warning that the European Central Bank has merely bought time for heavily indebted eurozone countries like Spain and Portugal to get government debt and spending under control. They fear that weak growth could undermine those efforts and force other countries to take the route of Greece.
What exactly is the package?
The European Stabilization Mechanism consists of commitments from the IMF and EU members to lend up to $1 trillion at low rates to countries that need it. Roughly $560 billion could come from European states, $80 billion from an existing EU fund originally created to deal with natural disasters, and $320 billion from the IMF. The United States has promised to make dollars available in exchange for euros, to help the European Central Bank lend to indebted countries or banks with obligations in dollars.
The eye-catching number aims to reassure investors that no European country or major financial institution will be allowed to default on its debt. IMF Europe director Marek Belka said on May 12 that "as much as Europeans need, we are prepared to provide. We are not worried about lack of resources."
How and when will funds be distributed?
If the confidence-boosting exercise succeeds, little or none of the money may ever be spent, particular if budget cuts recently announced by indebted states like Spain and Ireland reduce their deficits.