Why the Latest Short-selling Ban Is Futile
This week, we have renewed fears that the financial crisis in Europe is worsening by the day, leading to a continued lack of investor confidence. Ten-year bond yields in Spain are surging to record interest rates of 7.6% on news that additional regions within the country are requiring bailout money. I’m not sure why this is a shock, as I’ve been talking about the fact that this financial crisis is only going to get worse before it gets better.
This latest surge in interest rates for debt obligations follows protests in Spain against the austerity measures, which are being enacted to avert a further financial crisis. Investor confidence is best viewed through what people and institutions are willing to pay. With investor confidence continuing to be weak, money is flowing out of questionable countries such as Spain.
The worry is that Spain is the fourth largest economy in the eurozone; this is not a small nation like Greece, but a significant contributor to Europe. Spain, Italy and their internal regions have such a large level of debt that the financial crisis could escalate to the point that it pushes the euro project over the cliff.
This year has led to an exodus of investor confidence, as more people are awakening to the fact that I’ve been talking about for months—there is no easy solution for the periphery nations of Europe, such as Spain.
To make matters worse and to further aggravate investor confidence, Spain enacted a short-selling ban. This is ridiculous and ultimately futile, as this stance basically tells the market that the government realizes investing in Spain is inherently risky and is trying to prevent an accurate market price from being printed. Ultimately, investor confidence needs to be there for new investors to place their funds into an investment.
Even with this short-selling ban, which has historically never accomplished anything, if the underlying investments are poor, investors will continue to avoid making any investments and the price will continue to decline. If there was a short-selling ban placed on Research In Motion Limited (NASDAQ/RIMM), would that miraculously fix all of its problems? Of course not, because investor confidence would still be poor.
The reason why Spanish assets are going down is not because of short-sellers, but because the actual assets themselves and the nation have lost investor confidence and credibility in the claim that they will survive this financial crisis. While it seems funny that stocks like Apple Inc. (NASDAQ/AAPL) don’t have problems with short-sellers, the reason for this is that investor confidence is high as the underlying company is strong.
The focus should not be on short-selling but on having assets that are strong and viable. Spain’s problems will not be fixed by preventing short-selling, as investors will continue to dump their holdings until a solution is enacted to prevent the complete collapse of the nation as the financial crisis spreads.