Currency, stock markets fall as Germany bans naked short-selling

Germany said yesterday that it is banning ''naked short-selling''on bets against government bonds and banks, to contain financial speculation that  fuelled much of the euro zone's debt crisis.

The announcement triggered a fall in the value of the euro to below $1.22, a fresh four-year low and fall in global stock markets.

The country is banning euro-denominated government bonds, credit default swaps based on those bonds, and shares in Germany's 10 leading financial institutions till April 2011.

Short-sellers usually borrow shares, sell them in the market and then buy them back when the stock falls, to return them to the lender by keeping price difference as their profit. "Naked" short-selling occurs when a trader sells a financial instrument which he has not yet borrowed.

The ban takes effect from today 19 May to 31 March 2011 and will be applicable to naked credit default swaps. Credit default swaps are a type of derivatives known as CDS, that provide insurance for losses if a borrower goes bankrupt, and have become a lucrative trading market.

The ban was considered "due to the extraordinary volatility in government bonds in the euro zone." Massive short-selling could have endangered the stability of the financial system, according to the government's financial watchdog, Bafin.