Belfast Telegraph

In short, just a futile gesture

France, Italy, Spain and Belgium have banned short selling of bank shares, but this may be too little, too late Dan White says

For anyone who had any doubts about the gravity of the current financial crisis, the decision by France, Italy, Spain and Belgium to ban the short-selling of bank shares will have removed any uncertainty.

Although the ban lifted European bank shares on Friday, it remains to be seen if it will have any more than a short-term impact.

As American baseball player Yogi Berra once said: "It feels like deja vu all over again."

Irish investors need no reminder that following the 2008 'St Patrick's Day Massacre' the short-selling of Irish bank shares was banned.

For all the good it did. Within 10 months one of the Irish banks, Anglo, had been nationalised with the shareholders being completely wiped out, while the share prices of the other three, AIB, Bank of Ireland and IL&P have sunk to penny stock levels.

Something similar happened when the Greek debt crisis went nuclear last year with the country's financial regulator banning the short-selling of most Greek shares from April to September 2010. Despite the failure of the first Greek short-selling ban to buck the markets, the country reintroduced the ban on short-selling earlier this week. Clearly hope springs eternal for the Greeks.

At best a short-selling ban buys time. If, as happened in the case of previous bans, that time isn't used to tackle the underlying problems, the time gained from a short-selling ban is wasted. And the underlying problems are huge.

Global government debts now stand at around $40trn (€28trn), about two-thirds of the value of total world economic output. But that, literally, isn't even the half of it. More serious has been the huge build-up of private-sector debt in the advanced economies.

Recent research by management consultants McKinsey calculated that private-sector debt in 14 of the world's largest economies now averaged 200% of GDP, ranging from 407% in the UK to just 66% in India.

However, when one excludes China, Brazil, India and Russia from the mix, the average rises to an even more scary 265%. Even if global private-sector debt is 'only' 200% of GDP, that still translates into total private-sector debt in the region of $120trn (£73trn). Add in public-sector debt and the figure rises to $160trn (£97trn).

How on earth will all of these debts ever be repaid?

The answer is, of course, that they won't. It is this realisation that creditors face the prospect of 'haircuts' through some combination of outright default, debt restructuring and inflation that has pulverised bank share prices since 2007 and more recently - as the banks' worsening problems have forced governments everywhere to take an increasing proportion of bank liabilities onto their own balance sheets - the sovereign debt crisis also.

All of which means that the outlook for bank shares isn't going to improve any time soon. And what about other shares? The escalating sovereign debt crisis means that, although the US has lost its coveted triple-A rating, a handful of American companies, including Exxon Mobil, Johnson & Johnson, Microsoft and Automatic Data Processing, retain theirs.

A further indication of the reduced circumstances of Uncle Sam came last month when it was revealed that computer company Apple briefly had more cash on its balance sheet than the US government.

So, should investors dump bank shares and government bonds and put their money into the shares of good non-financial companies instead? The answer is yes, but with one important note of caution.

Large companies everywhere have made aggressive use of tax shelters and avoidance techniques to reduce their effective tax bills in recent years.

As budgets everywhere come under pressure, governments will be forced to seek out new sources of tax revenue. They will only be able to squeeze consumers, who are also voters, so much. The low tax rates being paid by corporates will become a red-hot political issue.