Angela Merkel: appeal

The government is coming under pressure from Germany and France to ban the speculative short-selling of bonds after Angela Merkel and Nicholas Sarkozy made a direct written appeal to Jose Manuel Barroso last week urging the European Commission to end so-called 'naked' swaps across the EU.

Merkel and Sarkozy joined forces to persuade fellow European leaders to accelerate steps to crack down on trade in credit default swaps – insurance against sovereign defaults – except for hedging purposes. In a letter to Barroso, the two said harmonisation across the EU was "indispensable".

The Department of Finance is believed to be reluctant to adopt the extreme approach of the Germans, who unilaterally outlawed short-selling in a range of financial instruments as a reaction to suspected "speculative attacks" on vulnerable European economies, such as Greece, Portugal and Spain.

"At this stage there are a number of issues which have to be taken into consideration and we'll have to see the details of any proposals before arriving at a conclusion," a spokesman for the Department of Finance said.

Analysts and critics of the German-led initiative have said the rules would damage the European hedge fund industry, which is largely serviced through the IFSC.

The commission is this week publishing a consultation paper for new EU-wide short-selling regulations, with draft proposals expected some time in July. Merkel and Sarkozy, however, want final proposals within a month.