EU finance ministers were caught up yesterday (17 May) in tense discussions over how to mitigate the risks posed by short-selling on sovereign debt.
The talks resulted in a compromise that frustrated MEPs, who are now gearing up for a fight on the regulation when the draft bill enters the European Parliament for scrutiny.
The short-selling of credit default swaps, a financial instrument believed to stretch sovereign debt levels, has come under particular scrutiny since the onset of the sovereign debt crisis. EU lawmakers are at loggerheads on whether short-selling aids or abets financial liquidity.
No agreement on short-selling ban
Finance ministers yesterday agreed to a watered-down text which allows the five-month-old EU regulator for securities, ESMA, to impose restrictions or even an outright ban on shorting of assets and sovereign debt. Naked sales, where the investor does not own the underlying asset, are included unless a sovereign can prove such a ban endangers liquidity.
But talks stopped short of satisfying a German call, echoed by a strong majority in the European Parliament, to ban naked short-selling of credit default swaps for government bonds, which politicians believe exacerbated sovereign debt levels.
A naked CDS contract is typically a bet taken by investment firms like hedge funds that the bond's issuer will end up in trouble. This is believed to become harmful when many investors speculate against the bond issuer, which ramps up the level of debt.
In a bid to win back a disenchanted electorate, German Chancellor Angela Markel has called for a ban on naked CDS. A majority of legislators in the European Parliament will want the same in upcoming talks to hammer out a compromise on the short-selling regulation.
Parliament will have a say
Last night, MEPs warned that finance ministers should not congratulate themselves too soon. Markus Ferber, a German centre-right MEP, warned that the Parliament will insist on limits on naked CDS on sovereign debt.
He admitted there was little evidence on either side to suggest naked shorting of CDS on sovereign debt was either harmful or beneficial to public coffers, but that an instrument which encourages the market to line up against a fall in prices cannot be good for anyone but investors.
Ferber also warned that the Parliament would have little time for a UK request to include member states and the European Commission in the decision-making on such limits. The original draft regulation leaves this to ESMA, one of three new regulators created in the wake of a crisis which revealed holes in national regulatory reach.
"We would be unwilling to introduce a new authority and on the other hand to saddle it with special limits on special products," Ferber told EurActiv.
Ferber's views represent those of a majority of MEPs from the Greens, Socialists & Democrats and centre-right European People's Party groups, who are getting ready for talks with the Commission and national finance ministries next week. The European Conservatives & Reformists, however, are against an extension of the ban to naked CDS.
At a briefing yesterday, German Deputy Finance Minister Jorg Asmussen said he would push for limits on shorting credit-default swaps linked to sovereign debt to be included in the final legislation.