Germany Takes Lone Stand in Hobbling Riskiest Trades

BERLIN — If Germany’s new measures to hamper speculation in European markets were meant to surprise, they succeeded. Just not quite in the fashion officials in Berlin might have intended.

Roundly criticized for shirking a leadership role as Europe grapples with its debt crisis, Chancellor Angela Merkel, in her offensive Wednesday, also included a fiery speech to the lower house of Parliament that combined a demand for governments to assert “primacy” over unruly markets with doom and gloom about what would happen if they failed.

“I’ll boil it down to its core,” she told lawmakers. “The euro is the foundation for growth and prosperity” in the European Union. “The euro is in danger. If we don’t deal with this danger, then the consequences for us in Europe are incalculable.”

Yet even as she spoke, markets were falling in response to Germany’s move late Tuesday against so-called naked short-sellers, closing down around 3 percent in much of Europe. And European officials, caught off guard, were criticizing Germany’s unilateral action — something Mrs. Merkel herself had said just a few days ago would be ineffective in a global market.

“Close cooperation in the E.U. on all issues which have a strong market impact is very important and needs to be strengthened,” the E.U. president, Herman Van Rompuy, told a news conference in Madrid, Reuters reported. He said that he would raise the issue of naked short-selling at a meeting of finance ministers in Brussels on Friday.

In a short sale, an investor sells borrowed assets hoping to buy them later at a lower price and pocket the difference as profit. In a naked short, the investor does so without actually having possession of the assets. Many Europeans have attacked the practice as casino-style speculation that can unfairly disturb the markets.

A number of European countries, including France, Austria, Belgium and Spain, still maintain prohibitions against naked short-selling of shares in their own major financial institutions, first imposed in 2008. But outside of Austria, there appeared to be little immediate enthusiasm for following Germany’s lead into new areas of regulation, including of government bonds.

“There’s relatively little trading of euro-zone government bonds in Paris — it’s more active in Germany,” Christine Lagarde, the French economy minister, told reporters Wednesday. “So we don’t envisage taking measures.”

Germany in fact has long championed European efforts to rein in what it sees as the worst excesses of Anglo-American financial capitalism. But the measures announced Wednesday were also directed at a domestic audience.

Mrs. Merkel was opening debate in the Bundestag on Germany’s contribution to the nearly $1 trillion safety net being set up by the European Union and International Monetary Fund for the euro zone’s weaker members. Once again, Germany will provide the lion’s share of the loan guarantees — nearly a fifth.

Mrs. Merkel has been pummeled in the German media over the previous bailout, which was specifically for Greece, and her coalition is still reeling after its huge election defeat two weeks ago in the state of North-Rhine Westphalia.

But the government’s new aggressive attack on speculators won her admiring headlines as the debate opened Wednesday.

The German financial regulator, BaFin, said Tuesday that it had banned naked short-selling of euro-zone government bonds and was reinstating a ban on naked short-selling in the shares of 10 German financial institutions — including Deutsche Bank, Commerzbank and Allianz — until March 31, 2011.

BaFin also enacted a ban on uncovered credit default swaps on euro-zone government bonds, meaning investors will not be allowed to buy default protection against debt unless they actually own the underlying bonds.

The moves carry uncomfortable associations for investors, as they echo measures taken by the global authorities to calm markets as the financial crisis began building to a crescendo in 2008. The U.S. Securities and Exchange Commission enacted several temporary bans against the naked short-selling of American banks that year, as indeed did most major developed countries. Last July, U.S. authorities tightened the rules governing naked shorting to curtail abuses in the practice.

The governing coalition in Germany is at odds over the decision to try and stem naked short-selling, with the Free Democrats divided over the issue and conservatives uncomfortable with it. In addition, Mrs. Merkel’s lack of consistency on the issue has been criticized.

“The government has no clear ambitions or vision over how to deal with the euro crisis,” said Josef Schlarmann, who represents the party’s export-driven small and medium-sized companies within Mrs. Merkel’s party, the Christian Democratic Union. “The leadership must be improved.”

Only last Sunday, Mrs. Merkel told the German Federation of Trade Unions that she opposed the idea of Germany taking any unilateral measures, since markets were global. Germany would require the support from the European Union as well as the United States, Japan and other countries, she said.

In fact, the majority of trading in sovereign European debt takes place well beyond the reach of German regulators, in London and New York. That left analysts and officials trying to understand how much impact the German measures would have.

A spokeswoman for the British Treasury declined to comment beyond a statement from the Financial Services Authority, the financial regulator, which said: “We note what Germany has implemented and will assist BaFin wherever appropriate. The scope of these bans relate to German participants or business taking place inside Germany and does not cover branches of German institutions outside Germany.”

Mrs. Merkel is expected to try and garner more support Thursday when she speaks at an international finance conference that will specifically consider how the markets can be regulated.

The U.S. team will be led by Mark Sobel, deputy assistant secretary of the Treasury. In London, the British Treasury was unable to say who it was sending. Mervyn King, governor of the Bank of England, is not attending.

Mrs. Merkel also reiterated her support for a tax on financial transactions, and called for called for stricter sanctions against euro-zone countries that violate deficit rules. The latter demand was echoed later by Axel Weber, head of the Bundesbank and a member of the European Central Bank’s Governing Council.

Mr. Weber told the German parliament’s budget committee that stronger rules on government spending by euro-zone countries are “essential and urgently needed.” The rules also should include provisions for an orderly insolvency of a member nation, Mr. Weber said, according to a text of his remarks released by the Bundesbank.

Mr. Weber defended the rescue package that the European Union pledged on May 10, and urged it be passed this week.

“There must be a speedy and decisive effort to stabilize and strengthen the fundamentals of the currency union, to avoid similar emergencies in the future,” Mr. Weber added.