Investment24: Is Short Selling the Cause or the Effect?

Online, March 21, 2010 (Newswire.com) - Baech (Switzerland), March 17, 2010 - After the announcement of strict cost-cutting measures by the Greek Prime Minister Papandreou, the situation in the euro-zone has eased during the last week. Stock market indices have also considerably risen and the German stock market index DAX reached again the important benchmark of 6,000 points. "The market is once again driven by euphoria as if there haven't been the problems with Greece", states Bernd M. Otto, founder of Investment24, and adds:" this week the Federal Reserve (FED) has kept the interest rate unchanged near zero, therefore the markets are still driven by liquidity."

But as a reaction to the recent financial turmoil in Greece, European leaders such as German Chancellor Angela Merkel and French President Nicolas Sarkozy, are backing an initiative in order to regulate speculative transactions against governments and big companies more strictly. The aim is a policy, which prohibits naked short selling in stocks, curbs trading in credit default swaps (CDS) and limits off-exchange deals.

Credit-default swaps function like an insurance against a bond default. If a borrower defaults, the CDS holder is paid by the seller of the protection. More and more frequently CDS trading has been used detached from its actual purpose by betting on the insolvency of a country or a company, taking purely speculative positions. Many market participants hold this proceeding jointly accountable for the financial problems of Greece. There is evidence to suggest that in recent weeks speculators have specifically bet on the fact, that the Mediterranean state won't be able to pay back its credits. Consequently refinancing was complicated.

"With doubt, there can be herd instincts at the stock market, which move market prices in one or another direction. This can also lead to an exaggeration", analyses Bernd M. Otto the current situation. But, from a macroeconomic point of view, short selling can also be an effective corrective in order to act contrary to an economic bubble. This way the efficiency of the market can be increased. Therefore it is debatable if speculators are really responsible for the budgetary crisis in Greece or if the problems are home made.

"It is unquestionably, that professional investors bet against stocks or currencies, but they only choose such speculations, which have a high probability of success", explains Bernd M. Otto from Investment24 Research. "Thus, speculators act like catalysts, they force a due development. It is possible, that they play a part in contributing to accelerate or boost this development, but they are not the cause."

The claim for a stronger regulation of hedge funds, which was once more heard related to the imminent bankruptcy of Greece, does not fight the root of all evil. Actually, most of the countries and companies are solely responsible for their problems. In fact, there are no sanctions against Greece, which has brightened its financial statements for years and hadn't reached the criteria for the euro-zone without such tricks, yet.