By trying to ring-fence the bond market Mrs Merkel's government has durably dented the world's confidence in Germany's and EU willingness to abide by principles of the free markets. Worse, this lack of understanding of market mechanisms may disrupt some
important liquidity flows and unexpectedly dry out other markets.
For a start, what does qualify as a "naked short"? Who will say? What about delta hedges? Structured products? Strategies involving convertibles? Short govies long corporate straddles as convexity hedge or against credit exposure? How can anyone be sure
of what's naked and what's covered?
If the aim was to reassure the forex market that the Euro could not be pressured by short selling and CDS, then it will be highly counterproductive. Impeding a number of strategies in Euro obliges liquidating some assets, closing down some books, and going
to other currency. Moreover it gives Euro a slightly exotic flavour which it really did not need right now.
Indeed pointing at "speculators", that invisible hand with no name, no face -and conveniently no voice to talk back- as if they were terrorists, is a most common emotional reaction from low level politicians in search of a scape goat to cover for their own
mistakes. But markets don't get fooled. The move will be known for what it is, weakness, potentially leading to surrender.
Ignoring all warnings, the Eurozone wrongly tolerated credit spreads among sovereign issuers for years and failed to address that structural issue. Changing the rules now that the game turns unfavourable to them confirms to the markets that they were right
about it. In a worst case scenario, it may even create pockets of off-shore trading at different spreads than on-shore, removing the Euro from the hard currencies club. That iron curtain feeling again.