Sat, Mar 7, 2015
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

Edhec-Risk: Germany’s restrictions are counterproductive

Friday, May 21, 2010
Opalesque Industry Update - EDHEC-Risk Institute considers that Germany’s restrictive measures on the sovereign debt markets are counterproductive, inconsistent and liable to hinder European growth

On the basis of numerous academic studies, along with its own research, including the position paper published in March 2010 by Professor Abraham Lioui entitled “Spillover Effects of Counter-cyclical Market Regulation: Evidence from the 2008 Ban on Short Sales,” EDHEC-Risk Institute considers that the unilateral measures taken by Chancellor Merkel on the sovereign debt markets, both on the short selling of sovereign bonds and credit default swaps (CDS), are counterproductive, inconsistent and liable to hinder European growth.

Counterproductive

Besides the fact that the lack of convergence on these issues with the US authorities leaves little hope of the measures being effective, EDHEC-Risk Institute thinks that this ban poses numerous problems and runs up against legal and practical obstacles that make it inapplicable or even counterproductive:

 It will be impossible for intermediaries and ultimately for regulators to verify investors’ holdings of the securities representative of the risk the credit default swaps are assumed to cover.
 A strict obligation to use credit default swaps to hedge the risk of sovereign debt would prevent sovereign nations from issuing long-term debt, as the CDS market for hedges of more than ten years is relatively illiquid.
 This prohibition makes it harder for countries to manage the interest rate risk on their debt actively, as their counterparties are no longer able to hedge the country risk of the interest rate swaps they may have entered into. This active management of the yield curve is a major component in the optimisation of the cost of public debt.
 By making the market for hedging default risk more complex, the markets may be deprived of the debt of countries with low ratings, of investors, and thus of liquidity, which will inevitably increase the cost of this debt.

Inconsistent

Even while European Commissioner Michel Barnier, in a letter to Professor Noël Amenc, Director of EDHEC-Risk Institute, on May 5, 2010, was confirming that “a group of experts from the Commission has been given the mission of studying the effects of CDS on price formation and the liquidity of the underlying bond market,” Chancellor Merkel’s unilateral decision, which renders the functioning of the sovereign debt markets responsible for the euro’s difficulties and the increase in the cost of credit for certain European countries, is inconsistent.

Once again, financial regulation decisions have been based more on preconceived ideas and populist posturing than on objective analysis of the facts. From that viewpoint, the position of the president of the European Commission who, without concerning himself with the work instigated on the subject by Commissioner Barnier, supports Germany’s reasoning, appears relatively incompatible with the requisite solidarity of the Commission and the consistency of European policy.

A hindrance to growth

A very strict definition of a naked sale would keep investors who finance public investment or companies that enter into contracts with sovereign nations or with state-owned companies from hedging the default risk of their counterparties. At a time when public-private partnerships and private financing of public infrastructure projects are considered one of the drivers of global growth, making it harder to manage country risk may, at the very least, increase the costs of these partnerships and this financing and, at worst, prove a major hurdle to their development.

This limitation on the hedging of risk for companies exporting capital goods, engaged in major international contracts with the public sector, and for the credit institutions that finance them, is of a nature, if it is generalised, to slow down or render more difficult the exports of a large number of countries within the European Union.

The following elements can be accessed by pressing [Ctrl] and clicking on the link:

Open letter addressed by EDHEC-Risk Institute to European Internal Market Commissioner Michel Barnier on March 15, 2010: Source.

Commissioner Barnier’s response on May 5, 2010 (in French): Source.

EDHEC-Risk Institute Position Paper “Spillover Effects of Counter-cyclical Market Regulation: Evidence from the 2008 Ban on Short Sales,” March 2010: Source.


EDHEC-Risk Institute is part of EDHEC Business School, one of Europe’s leading business schools and a member of the select group of academic institutions worldwide to have earned the triple crown of international accreditations (AACSB, EQUIS, Association of MBAs). www.edhec-risk.com.


Bg

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. SkyBridge opens office in Palm Beach County[more]

    Where better for a southern location than South Florida? SkyBridge Capital, which is headquartered in New York, has opened an office in Palm Beach Gardens. Palm Beach Gardens is a "Signature City" in northern Palm Beach County, with a population of around 49,000.

  2. Outlook - Philippe Jordan predicts 'alternative beta' to displace hedge funds, Stan Druckenmiller says Europe, Japan stocks will outpace U.S.[more]

    Philippe Jordan predicts 'alternative beta' to displace hedge funds From Investordaily.com.au: The disappointing performance of hedge funds in recent years is a result of "too much money chasing too little alpha", argues Capital Fund Management. Speaking to InvestorDaily, CFM partner Phi

  3. Patrick McCormack to shut down hedge fund Tiger Consumer[more]

    Komfie Manalo, Opalesque Asia: Patrick McCormack is shutting down his hedge fund Tiger Consumer Management after 15 years "to spend more time with his family," reported Reuters. Tiger Consumer ended February up 4.6% (+3.9% YTD) and assets roughly $1.4bn, reported

  4. Investing - As rig count falls, hedge funds pile into long crude futures, Parus tactically shifts long/short exposure ratios, Mario Draghi outflanking Kuroda as bearish euro bets surge, Prime Capital’s 500.com bet derailed after 41% drop[more]

    As rig count falls, hedge funds pile into long crude futures From 247wallst.com: In the week ended February 27, the total number of rigs drilling for oil in the United States came in at 986, compared with 1,019 in the prior week and 1,430 a year ago. Including 281 other rigs mostly drill

  5. Outlook - 5 reasons why 2015 is looking like a breakout year for alternative investments, Hedge fund manager Dan Loeb predicts disappointment for funds seeking energy distress[more]

    5 reasons why 2015 is looking like a breakout year for alternative investments From Forbes.com: …After a strong 2014, the public markets have been off to a choppy start in 2015. This year, savvy investors may be looking for alpha elsewhere. For many institutions and high-net-worth indivi