A piecemeal ban on short-selling of financial stocks in Europe appeared to restore investor confidence yesterday as stocks rallied across the continent.
France, Italy, Spain and Belgium imposed bans, which varied according to each country, while Britain, the Netherlands and Austria said they saw no need for action. Germany said it would instead push for a Europe-wide ban on so-called naked short-selling.
The European Commission said a pan-European framework would be more attractive to deal with the issue, and the chairman of the European Securities and Markets Authority called on policymakers to adopt a plan for Europe-wide rules on short selling "as quickly as possible".
Short-selling is the process through which an investor borrows shares and sells them on the expectation their price will fall and they can then be bought back at a lower price. In a naked short sale, the investor has not borrowed the share, but still bets on a drop in the share price.
Market players said the ban did not tackle the root causes of investors' concerns - joined-up, long-term fiscal policy in the euro zone - and pointed out that nervous mutual funds were to blame for the sell-off.
Lothar Mentel, the chief investment officer at Octopus Investments, said the lack of coordinated action from national regulators on short-selling restrictions threatened to undo the temporary respite in the markets.
"If at the core of this whole rout is disappointment with certain irresponsible behaviours of policymakers - note the game of chicken in the US - they really need to get their act together and prove they aren't all on holiday," Mr Mentel said.
A crackdown on speculative short-selling is unlikely to arrest moves from institutional investors who have decided they have little stomach for big holdings in banks and indebted governments who might call on them again for emergency capital.
"Data from various regulators of late have shown there is no short-selling activity out of the norm," said Davide Burani, a financial analyst at the Italian fund manager Horatius.
"Investors are selling in Italy from fear. Italian banks are holding around €200 billion [Dh1.04 trillion] of Italian bonds."
European markets have swung wildly this week on rumours about the health and funding needs of indebted eurozone governments, and more recently on some of its major banks, which have sent shares tumbling.
On Friday morning the STOXX Europe 600 banking index yo-yoed, then crept steadily higher. In midmorning trading, it showed a 2.3 per cent gain, helping the broader market to advance 1.9 per cent. French banks, at the centre of much of the market's attention and included in the ban on short selling, were up: Société Générale rose 1.6 per cent, BNP Paribas added 1.2 per cent and Credit Agricole gained 0.4 per cent.
Alessandro Frigerio, the fund manager at Milan's RMJ Sgr said the short-selling ban could work if, combined with proposals from next Tuesday's meeting of the French president Nicholas Sarkozy and the German Chancellor Angela Merkel, it were to "give the idea that there could be a rescue for the euro zone and a rebound in the market".
The European Securities and Markets Authority said on Thursday that short-selling combined with rumour-mongering created a strategy that was "clearly abusive".
France banned short selling on 11 financial stocks for 15 days, Spain said it would protect 16 stocks for 15 days, Belgium banned short selling of four financial stocks for an indefinite period and Italy said its ban covered 29 companies in the banking and insurance sector.
Banks on the list included France's BNP Paribas and Société Générale, and Spain's Santander and BBVA.
The French finance minister Francois Baroin welcomed the ban and said it had highlighted the government's commitment to ensuring financial stability.