The five-year credit default swap (CDS) price of Société Générale – the precipitous sell-off that prompted European regulators to act – has recovered sharply since the ban was imposed.
The other two major French banks that had been caught up in the SG panic, Crédit Agricole and BNP Paribas, also rallied hard. Belgium, France, Italy and Spain imposed the ban, but before the regulators start patting themselves on the back for having saved the European economy there are several other factors to be considered:
Firstly, it seems that there was no real substance to the rumours circulating about SG the week before last. They were vigorously denied by the bank itself, and on August 12 traders were very reluctant to pass on what they had heard, even on an entirely unattributable basis. Moreover, the ECB has taken steps to buy up substantial quantities of French and Italian assets. The scale of this buying was hailed as a “positive surprise” by one dealer and also helped the market. Finally, the market was much calmer last week than it had been the previous week.
The short-selling ban certainly showed that the regulators meant business, but it would be wrong to attribute last week’s rally solely to their actions. It is, however, somewhat worrying, though perhaps not a surprise, to find European regulators once again so keen to shoot the messenger. Banning short selling of financial stocks does not make institutions any more solvent or commercially viable.
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