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AFP, 19 May 2010
Stock Markets in tailspin after German Selling Ban

LONDON (AFP) - – European stock markets slumped on Wednesday and the euro hit another four-year dollar low in reaction to new German trading controls and persistent concern about the state of the eurozone economy, analysts said.

In early morning deals, London's benchmark FTSE 100 index of leading shares dived 1.64 percent to 5,220.21 points, Frankfurt's DAX 30 shed 1.43 percent to 6,067.83 points and in Paris the CAC 40 lost 2.07 percent to 3,542.61.

The European single currency nosedived to a new four-year low at 1.2144 dollars in earlier Asian deals, with some traders saying the German move had accelerated the trend. It pulled back to stand at 1.2196 in London trade.

Markets slid after Germany's securities market regulator Bafin slapped a ban on so-called naked short-selling in shares of 10 financial institutions and eurozone government bonds, in a bid to an end to severe fluctuations.

"Angela Merkel's knee-jerk reaction to ban speculators from short-selling debt has sent the markets into a tailspin," said ETX Capital senior trader Manoj Ladwa.

"The reverberation of her decision is likely to have a serious negative impact on not only the euro, but also other European countries who may impose a similar restriction."

Naked short selling occurs when investors sell on the market stocks or bonds they don't own and haven't even borrowed, hoping to be able to buy them back later at a lower price, thereby earning a profit.

European stocks had risen on Tuesday as better-than-expected US economic data had helped offset persistent concerns about Europe's debt crisis.

"Equity markets have certainly started the session with something of a hangover in light of those German short-selling restrictions," said David Jones, chief market strategist at IG Index.

"Granted the initial reaction perhaps hasn't been quite as bad as we had feared, but major European indices are all lower and the reality is that the regulators are looking edgy."

In earlier Asian trade, Tokyo declined 0.54 percent to an 11-week low on Wednesday as another dip in the euro weighed on Japanese exporters, brokers said.

Bearish sentiment towards the single European currency has prevailed even after eurozone finance ministers vowed to fix the region's finances while expressing concern at their plunging currency.

After agreeing a 110 billion euro (140 billion dollar) bailout for Greece and a 750 billion euro fund for other European Union nations that may struggle to repay loans, Europe's leaders are scrambling to put the plan into action.

Fears are also growing that subsequent austerity measures being put in place in the eurozone will hit growth.

Analysts said the euro was also weighed by the US Senate's move on Monday to approve a measure aimed at blocking International Monetary Fund aid packages like the one for Greece if they lack a guarantee that the money will be repaid.

Meanwhile, there was little comfort from top economist Nouriel Roubini, who was one of the few experts to forecast the financial crisis.

"What's happening in Greece is just the tip of an iceberg of a broader range of sovereign debt issues, of deficit, in many advanced economies," he warned late Tuesday.

The new crisis could occur "not just in the eurozone but UK, US, or Japan," he said in a speech at the London School of Economics.

"The next stage of the crisis could be a sovereign debt crisis that could lead to a double-dip recession."

He reiterated his view that "there is a possibility of a breakup of the monetary union."

"One or more countries of the eurozone could default," said the New York University professor.