Euro drops as Merkel warns of 'danger'
Updated on 19 May 2010
German chancellor Angela Merkel has sparked mayhem in the markets, and caused the euro to drop sharply, after warning that the single currency was in danger. But one analyst tells Channel 4 News the move was "politically motivated".
The euro was sent spiralling to four-year lows, before bouncing back this afternoon on rumours that the European Central Bank (ECB) may step in.
Investors took fright as Merkel opened a parliamentary debate on Germany's contribution to the euro bailout package – due to be voted on by German lawmakers on Friday.
She called for tougher penalties for countries that violated EU stability rules, warning that the dangers of a currency fail were "incalculable".
"Each of us feels that the current crisis of the Euro is the biggest test Europe has faced in decades, even since the Treaty of Rome was signed in 1957. This test is existential and I add it must be overcome," she said.
European markets were poised for a drop this morning, following Germany's unilateral ban on 'naked short-selling' of ten financial stocks – the biggest German banks and insurance firms - and euro government bonds late last night.
Naked short-selling is when investors sell off financial instruments without holding the underlying investment. The move had been intended to calm "destructive" financial markets, Merkel said, but it had the opposite effect as traders pondered the reasons behind the move.
One told Channel 4 News that there had been no obvious speculation in German banks and that the market for government bonds had stabilised following the announcement of the 750bn euro bailout earlier this month intended to shore up confidence in Greece and other debt-ridden Eurozone countries.
"The market had seen the stabilisation package put in place and it was in wait and see mode…but then this additional piece of news from Germany became available today and no one could see that there was a clear and present danger to the integrity of European Financial markets," said Nigel Sillis, director of fixed income and currency at Baring Asset Management.
Instead, he said it was more likely that Merkel's move had been politically motivated. The German Chancellor faces a vote on Friday on her country's participation in the Eurozone rescue/stabilisation package and she is facing tough opposition, both from the electorate and within her own government and the opposition.
By announcing a crackdown on speculators, Merkel is hoping to appeal to her opponents – all of whom largely blame financial services for the eurozone debt crisis – and get them to back her in the vote on Friday. But her move backfired and sent markets falling, pushing down the FTSE to close down three per cent, while the Dow Jones also fell in New York as traders sold shares and ran for safe haven assets like treasuries and gold.
The euro tumbled to its lowest level since April 2006. It did briefly rally as a rumour circulated in the market that the European Central Bank was set to intervene to shore up the euro, however, no such action, or statement, was forthcoming.
The ECB has been buying government bonds, to help calm markets during the debt crisis, but it has so far not delved in to buy up the Euro and boost its value and experts say it is unlikely to do so.
The euro slumped to $1.2144 before rallying somewhat to rise to $1.23, still way off the $1.24 it was before Merkel’s ban on short selling was announced. Her comments on the Euro were also seen as weighing on the markets.
Confirming the ban by German regulator BaFin this morning, she said. "If we don't avert this danger than the consequences for Europe are incalculable," she said.
The euro remains down against the dollar, by some 14 per cent so far this year.
