German Chancellor Angela Merkel, spooking investors on Wednesday by saying the euro was in danger, urged speedy action to stop market "extortion" and said the EU needed a process for "orderly" insolvency of members.
Recommending tough moves against "notorious deficit sinners" in the euro zone, such as withdrawing voting rights, the German leader told parliament in Berlin: "Above all, what's necessary is to develop a process for an orderly state insolvency.
"With that we would create an important incentive for euro zone member states to keep their budgets in order." Germany shocked financial markets on Tuesday by taking an apparently unilateral initiative involving an immediate ban on naked short-selling of euro government bonds and on related transactions in credit default swaps (CDS).
The country's financial regulator also banned naked short sales of shares in Germany's 10 leading financial institutions.
European shares fell in response and German bunds soared as rattled investors sought refuge in safe-haven assets.
Short selling is a trade that bets the price of an asset will fall, while the naked variant of the practice involves a trader selling a financial instrument without first borrowing the asset or ensuring that it can be borrowed, as would be done in a conventional short sale.
"In those areas where unilateral action by Germany won't cause any harm, we will also act on our own," Merkel said.
It was not immediately clear whether Germany's overnight ban was taken in consultation with euro zone partners.
Austria said it wanted to discuss the Europe-wide measure at a meeting of EU finance ministers on Friday.
Euro zone leaders, who last week tried to calm markets with a 750 billion euro ($930 billion) emergency debt package, are also likely to push for an EU-wide tax on financial transactions to help cover the cost of the debt crisis triggered by Greece.
Some officials and economists say such a tax only makes sense if it is introduced globally, though Merkel said the EU would do it unilaterally if the Group of 20 nations failed to reach such an agreement at their summit in June.
"The introduction of a financial transaction tax only makes sense if it is introduced on a global basis, which doesn't seem very likely. Otherwise we see a risk investors will go to tax-free countries," said Equinet analyst Philipp Haessler.
Some analysts said Germany's move against short-selling would have little impact in itself, since most such trade take place in London and New York — but they warned it could send a negative message to markets already shaken by the Greek crisis.
"It's once more about the timing, which is silly, as investors will assume that the sovereign debt crisis is far away from being over," said analyst Heino Ruland, predicting that it would continue to weigh on the euro.
David Keeble, global head of rates strategy at Credit Agricole in London, said the initial strong reaction to the German measures on the share and debt market looked overblown.
"We think that the impact will be quite moderate and certainly not warranting the massive reaction in equities and bond futures seen overnight," he said.
"It appears that (German) market makers have been excluded from the regulations so if a customer comes and asks for an offer, the market maker can sell them without worrying about covering the position."
Commerzbank CEO Martin Blessing said it was the kind of regulation needed to put an end to "exorbitant speculation" and recommended it be extended to a broader range of credit default swaps, which he said aggravated the Greek crisis.
The euro fell over half a U.S. cent from the day's high at $1.2228 to $1.2145 on the German chancellor's comments after the short-selling ban hit sentiment in Asia.
"I'll boil it down to its core: The euro is the foundation for growth and prosperity, along with the common market — also for Germany. The euro is in danger," said Merkel.
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