Sarkozy, Merkel Say Action Urgent on Swaps Market

Bloomberg (June 9)--France and Germany called on the European Union to speed up curbs on financial speculation,
saying some bets against stocks and government bonds should be banned as markets suffer a resurgence of “strong volatility.” In a joint two-page letter, French President Nicolas Sarkozy and German Chancellor Angela Merkel sought proposals from European Commission President Jose Manuel Barroso on a ban on so-called naked short sales of “certain” stock and bonds, as well as on naked credit-default swaps on sovereign bonds. They call for proposals to be ready by the middle of next month rather than October as had been planned.


The letter shapes a common position between the leaders of Europe’s two largest economies after Merkel last month caught other EU leaders off guard when she unilaterally banned naked sovereign credit-default-swaps within Germany. She argued the actions of “speculators” exacerbated the European debt crisis that has rattled markets and driven the euro to a four-year low. Proposals to regulate short selling and credit-default- swaps will be brought forward and come “during the summer,” Commission Spokeswoman Pia Ahrenkilde-Hansen told journalists in Brussels today. She didn’t specify whether they would be ready by July as requested by Merkel and Sarkozy in their letter. “The return of strong volatility in the markets makes it necessary to question certain financial methods and certain products such as naked short-selling and credit default swaps,” the leaders said in the letter, e-mailed by their respective offices in Paris and Berlin today.


‘Imperative’ to Regulate
While Sarkozy made greater market regulation one of his main rallying cries since the start of the financial crisis, he has so far refused to follow Merkel’s lead and instead pushed for EU-wide measures. Stocks around the world dropped on May 19 when the temporary German ban was introduced. Merrill Lynch’s MOVE Index, an options-based gauge of expectations for price swings in Treasuries, rose to 97.2 from a low of 74.10 on March 17. Eddy Wymeersch, chairman of the Committee of European Securities Regulators, said May 26 there was no “unanimous move to follow
the German route.” “The commission is doing a good job, just that the president and the chancellor want it speeded up,” French Finance Minister Christine Lagarde told reporters today after a meeting of Sarkozy’s Cabinet. “Regulating financial markets is imperative to restore confidence.”

July Deadline
The Commission, the executive arm of the EU, should have its proposals ready before a mid-July meeting of European
finance ministers, the letter said. The Commission is drafting proposals on short selling and sovereign credit default-swaps which had been due in October. Credit-default swaps are derivatives that pay the buyer face value if a borrower -- a country or a company -- defaults. In exchange, the swap seller gets the underlying securities or the cash equivalent. Traders in naked credit-default swaps buy insurance on bonds they don’t own. Naked short selling involves
selling a security without ever being in possession of it.

“I don’t see any reason why these proposals shouldn’t be accelerated,” Richard Portes, professor of economics at London
Business School, said in a telephone interview today. “If the political will is there then capitalize on that.” The Commission should “consider the possibility of a ban at the European level of naked short sales on all or certain shares and bonds, and on certain naked CDSs on sovereign securities,” the letter said.

EU Proposals
“It would be very surprising if any proposals from the European Commission would be softer than what Germany has put in place,” Thomas Tindemanns, a financial regulatory lawyer at White & Case LLP in Brussels, said in a telephone interview. Merkel’s Cabinet on June 2 nevertheless backed a draft bill that bans naked short-selling of credit-default swaps on euro- area government bonds and stocks of German companies. The draft, which will be put to parliament before the summer recess begins on July 9, also gives Germany’s Finance Ministry and the BaFin regulator leeway to ban euro-related derivatives trades without seeking further endorsement by lawmakers, and obliges investors to inform BaFin of naked short positions on shares in German companies.

Merkel and Sarkozy agreed in a phone conversation to work “closely together,” the German leader’s office said in a statement issued late yesterday. They said they will prepare jointly for a June 17 EU summit and the subsequent Group of 20 gathering in Canada. Government officials have said the sovereign debt crisis and weak euro will dominate both meetings. European governments must “deliver a strong and unified position” on financial services rules before the G-20 summit in Toronto, Barroso told journalists last week in Brussels. The commission considered the Merkel-Sarkozy letter “an expression of support” for its approach on short selling, Ahrenkilde-Hansen said. “We welcome the sense of urgency.”