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Germany to fully ban short selling?

business Updated: May 26, 2010 21:27 IST

Germany inched toward a wider ban on naked short selling of stocks and Italy approved austerity measures to contain a eurozone crisis that could lead US officials to urge stress tests for European banks.

A draft German finance ministry document called for restrictions on speculative trades on all shares, widening a ban imposed last week that only covered top financial firms, euro government bonds and related credit default swaps.

Berlin’s initial move stunned markets though it was seen as symbolic because it was isolated and most of the affected trading takes place in London.

“What’s driving the markets is concern about European banking risk,” said Bob Parker, vice-chairman of asset management at Credit Suisse.

US Treasury Secretary Tim Geithner said on Wednesday there should be a coordinated global approach to reforms as he kicked off a European tour to discuss the eurozone crisis.

As he began talks, the European Commission outlined a framework for a levy on banks’ assets, liabilities or profits to pay in advance for the cost of future crises. That set the stage for a showdown on the tax at a meeting of G20 leaders in June.
Fears that the European debt crisis could engulf some banks have made them reluctant to lend to each other as happened
during the 2007-2009 global financial crisis.

The costs for banks to borrow dollars from each other crept up to a new 10-month high on Wednesday.

Geithner will also urge European officials this week to conduct some form of banking system stress tests. The stress tests would differ from those conducted by US regulators because Europe lacks a huge bailout fund like the $700-billion Troubled Asset Relief Programme to plug any capital deficiencies found.

Italy’s cabinet approved a multibillion-euro package of budget cuts designed to slash the government’s deficit to beneath the EU ceiling of 3.0 per cent of GDP by 2012.

Details of the measures included a four-year freeze on public sector salaries, and a reduction in state personnel by replacing only one in five of those who leave.