Ban on short-selling 'exposes lack of common sense'

A TOP City figure has hit out at Germany's unilateral "shorting" ban last week and the recent Brussels crackdown on hedge fund regulation as showing that political strains in the eurozone are trumping "common sense".

Dick Saunders, chief executive of the Investment Management Association, the trade body for the UK's 3.4 trillion asset management industry, said such controversial moves also disadvantaged British investors.

As sovereign debt worries continue to weigh on stock market sentiment this weekend, Saunders said recent regulatory crackdowns in the eurozone showed it was "not an optimal currency zone".

He said: "The strains (in markets] we are seeing are the result. It makes you think, thank goodness the UK is not in it (the euro]."

The IMA chief said there had been a significant devaluation of sterling in the past 18 months, and that had cushioned the impact of the UK recession. "That would not have been possible if we had been in the euro," Saunders said.

Saunders, a highly influential City figure, likened Germany's controversial ban last Wednesday of "naked" short-selling of eurozone government debt and shares of major financial companies to "shooting the canary in the coalmine".

He said such bans were ineffective and aimed at the wrong target, the underlying problem in Europe being Greek sovereign debt and fears that this could spread. He cited the Financial Services Authority's temporary ban on the shorting of UK financial stocks two years ago amid market volatility at the time of big rights issues by the likes of Royal Bank of Scotland, HBOS (now owned by Lloyds) and Bradford & Bingley. "There were bigger falls in (share] values and more volatility when the shorting ban was introduced. It made no difference," he said.

"Naked" shorting is selling an asset you have not borrowed in the first place in the hope the price will fall and you will profit on the difference.

Saunders, whose members manage 500 billion of assets out of Scotland, said he believed the actions of German Chancellor Angela Merkel were a clearly "populist" attempt to sell the controversial EU Greek bailout package to the German public.

But he said other regulatory moves in the eurozone also indicated that "European ideology is taking the place of common sense".

He cited the EC's Directive on Alternative Investment Fund Managers, which aims to provide self-styled "robust and harmonised" regulation of the hedge fund industry, a development widely seen as negative for the City of London.