What are these people doing?

The ban on naked short sales of euro-denominated government bonds, credit default swaps based on those bonds, and shares in Germany\’s 10 leading financial institutions was announced after European markets closed on Tuesday.

This only applies in Germany but still, what on earth are these people trying to do?

Banning CDSs on bonds? You mean people must now carry the risk of default themselves, rather than being able to hive it off to others?

Umm, don\’t people understand that this will simply increase the interest that governments must pay to borrow?

Seriously, what on earth are these people doing?

6 thoughts on “What are these people doing?”

  1. Is it a ban on naked short sales of CDSs, not the CDSs themselves? The text is a bit confusing…

  2. they are jerking their knees. Their target is the testicles of the evil speculators; but they’ll end up bruising their own nuts instead

  3. My comment seems to have got eaten, which said something like

    ‘Isn’t the naked short selling of CDS that has been banned, not the products themselves?’

  4. Excellent news! I don’t understand why bond holders would not want to charge an interest rate sufficient to cover the risk of default, or why the “others” (CDS sellers) would not want to charge effectively the same default risk premium to the bond holders for taking on this risk. Do the CDS sellers and bond holders significantly disagree about the riskiness of the government bonds?

    More importantly, how much of Germany’s debt (~1.7 trillion Euros?) is covered by CDSs, and how much could these CDS sellers actually afford to pay out in the event of a default? In other words, is the insurance provided to the bond holders by CDS an illusion? If so, and if this is resulting in governments being able to borrow at an artificially cheap price, this is a market failure.

  5. If Matthew’s wrong then they’ve banned shares in Germany’s 10 leading financial institutions

    I think Matthew’s right.

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