Euro slides after German trading crackdown

Germany clamped down on speculative trading, introducing new rules Wednesday in a bid to ease the market volatility it says threatens the eurozone economies.

Euro slides after German trading crackdown
Photo: DPA

Germany’s securities market regulator Bafin banned naked short sales of certain securities, in particular the government bonds of the 16 countries that use the euro, from midnight Tuesday (2200 GMT).

But the euro continued to fall on the world’s currency markets, with some traders saying the German move had accelerated the trend.

Naked short selling is when an investor sells a security they do not own and have not yet borrowed, hoping to be able to buy it later in the day at a lower price, thereby earning a profit.

“The extraordinary volatility of the bonds of eurozone states” justified the ban on short selling said a statement from Bafin.

Given current market conditions, “new excessive price variations could harm many on the financial markets and threaten the stability of the whole financial system,” said the statement.

In addition to eurozone government bonds, the ban also applies to certain credit default swaps and on the shares of 10 financial institutions, and will be in force until March 31 next year.

Short selling has been repeatedly implicated in quick drops in markets, and its use has been limited or banned during the financial crisis on major exchanges.

The euro however, kept falling.

In New York, it fell further against the dollar Tuesday, fetching $1.2206 at 2100 GMT after sinking to $1.2162, its lowest level since April 17, 2006 in New York trading.

And in Tokyo Wednesday, it was changing hands at 1.2144 dollars in early trade, a new four-low against the dollar.

“Reports on restrictions on the financial markets always work as the negative factor to the relevant currency,” said Daisuke Karakama, senior market economist at Mizuho Corporate Bank, echoing comments from US traders.

Greek officials say speculative trading played a major part in provoking their debt crisis.

Athens was eventually forced to accept a €110-billion bailout from the European Union and the International Monetary Fund earlier this month.

When that failed to calm investors’ fears that the Greek crisis could spread to other heavily indebted eurozone members, the EU and IMF were forced to put together a €750-billion fund.

In Brussels meanwhile, EU finance ministers on Tuesday moved towards tighter curbs on the trillion-dollar hedge fund industry, widely blamed for speculative financial attacks, in particular on currencies.

They agreed on talks with the European parliament to standardise hedge fund regulation across the 27-nation bloc, despite opposition from Britain, which hosts 80 percent of Europe’s share of the lucrative industry.

German Chancellor Angela Merkel said Tuesday that she would also push for an international tax on financial markets during next month’s summit of leaders of the G20 group of leading developed and emerging economies.

European Commission chief Jose Manuel Barroso last week urged G20 leaders to back an international tax on financial institutions at the G20 summit on June 26 and 27 in Toronto.

In April, G20 finance ministers asked the IMF to look at taxing big banks to help cut risk and pay for any future financial failures.

But while Washington and Europe back the financial sector tax, Canada has led the opposition: its banks largely steered clear of crisis thanks to prudent risk taking.

IMF experts say the taxes must be coherent among all G20 members to prevent banks from avoiding them by moving operations to countries where the levies were not applied.

There was little comfort meanwhile from leading economist Nouriel Roubini, one of the few experts to predict the financial crisis.

“What’s happening in Greece is just the tip of an iceberg of a broader range of sovereign debt issues, of deficit, in many advanced economies,” he warned Tuesday.

The new crisis could occur “not just in the eurozone but UK, US, or Japan,” he said in a speech at the London School of Economics.

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The Euro celebrates its 20th anniversary

The euro on Saturday marked 20 years since people began to use the single European currency, overcoming initial doubts, price concerns and a debt crisis to spread across the region.

The Euro celebrates its 20th anniversary
The Euro is projected onto the walls of the European Central Bank in Brussels. Photo: Daniel Rolund/AFP

European Commission chief Ursula von der Leyen called the euro “a true symbol for the strength of Europe” while European Central Bank President Christine Lagarde described it as “a beacon of stability and solidity around the world”.

Euro banknotes and coins came into circulation in 12 countries on January 1, 2002, greeted by a mix of enthusiasm and scepticism from citizens who had to trade in their Deutsche marks, French francs, pesetas and liras.

The euro is now used by 340 million people in 19 nations, from Ireland to Germany to Slovakia. Bulgaria, Croatia and Romania are next in line to join the eurozone — though people are divided over the benefits of abandoning their national currencies.

European Council President Charles Michel argued it was necessary to leverage the euro to back up the EU’s goals of fighting climate change and leading on digital innovation. He added that it was “vital” work on a banking union and a capital markets
union be completed.

The idea of creating the euro first emerged in the 1970s as a way to deepen European integration, make trade simpler between member nations and give the continent a currency to compete with the mighty US dollar.

Officials credit the euro with helping Europe avoid economic catastrophe during the coronavirus pandemic.

“Clearly, Europe and the euro have become inseparable,” Lagarde wrote in a blog post. “For young Europeans… it must be almost impossible to imagine Europe without it.”

In the euro’s initial days, consumers were concerned it caused prices to rise as countries converted to the new currency. Though some products — such as coffee at cafes — slightly increased as businesses rounded up their conversions, official statistics have shown that the euro has brought more stable inflation.

Dearer goods have not increased in price, and even dropped in some cases. Nevertheless, the belief that the euro has made everything more expensive persists.

New look

The red, blue and orange banknotes were designed to look the same everywhere, with illustrations of generic Gothic, Romanesque and Renaissance architecture to ensure no country was represented over the others.

In December, the ECB said the bills were ready for a makeover, announcing a design and consultation process with help from the public. A decision is expected in 2024.

“After 20 years, it’s time to review the look of our banknotes to make them more relatable to Europeans of all ages and backgrounds,” Lagarde said.

Euro banknotes are “here to stay”, she said, although the ECB is also considering creating a digital euro in step with other central banks around the globe.

While the dollar still reigns supreme across the globe, the euro is now the world’s second most-used currency, accounting for 20 percent of global foreign exchange reserves compared to 60 percent for the US greenback.

Von der Leyen, in a video statement, said: “We are the biggest player in the world trade and nearly half of this trade takes place in euros.”

‘Valuable lessons’

The eurozone faced an existential threat a decade ago when it was rocked by a debt crisis that began in Greece and spread to other countries. Greece, Ireland, Portugal, Spain and Cyprus were saved through bailouts in return for austerity measures, and the euro stepped back from the brink.

Members of the Eurogroup of finance ministers said in a joint article they learned “valuable lessons” from that experience that enabled their euro-using nations to swiftly respond to fall-out from the coronavirus pandemic.

As the Covid crisis savaged economies, EU countries rolled out huge stimulus programmes while the ECB deployed a huge bond-buying scheme to keep borrowing costs low.

Yanis Varoufakis, now leader of the DiEM 25 party who resigned as Greek finance minister during the debt crisis, remains a sharp critic of the euro. Varoufakis told the Democracy in Europe Movement 25 website that the euro may seem to make sense in calm periods because borrowing costs are lower and there are no exchange rates.

But retaining a nation’s currency is like “automobile assurance,” he said, as people do not know its value until there is a road accident. In fact, he charged, the euro increases the risk of having an accident.