France

A month ago, Sarkozy was pissed that Merkel had dared to take the initiative over him and to ban naked CDS trading. Being a stubborn reactionary, this action only prolonged his inevitable decision to do the same (because politicians, being the wise Ph.D's they are, realize fully all the nuances of screwing around with the financial ecosystem). However, looking at this week's DTCC data, we have a feeling he may accelerate his decision to join the CDS-ban team. With a total of 456 million in net notional derisking, France was the top entity in which protection was sought in the past week. In a very quiet week, where the 5th most active name did not even make it past the $100 mm threshold, France was more than double the number two sovereign - Mexico (we are unclear if this is some sort of contrarian move to the Yuan reval, which Goldman was pitching as MXN positive, which means traders likely hedged by loading up on Mexican CDS). But what is probably most notable, is the sudden and dramatic appearance of China in the top 3rd position. Welcome China! And after tonight's surprise PMI miss and the resulting market drubbing, we are confident within a week or two, China will promptly become a mainstay of the top 3, and will quickly rise to the top position, where it rightfully belongs. We are also confident those perennial Eastern European underdogs, Romania and Bulgaria will shyly make an entrance in the top 10 next week.

Not sure how this is news, but apparently it is impacting spreads currently. S&P officials are heard saying that they are evaluating the UK (-1 to 77.5 bps) rating in light of the emergency budget, that Spain (+26 to 244) needs additional measures to meet fiscal targets, and that France (+3 to 80.75) has very high deficits. This will certainly not help once again surging European cash and CDS spreads. And does anyone remember Greece? As the chart below shows, its various spreads to all other European sovereigns are blowing out. Risk off in Europe, as the EURCHF just hits a new all time low of 1.3590.

For the first time in over 2 months, last week CDS traders ignored their ongoing derisking barrage in Great Britain CDS, and instead shifting their attention to the very heart of European darkness, the two countries that are in charge of it all - Germany and France. There was over 750 million worth of German CDS derisked, in 58 contracts, with France close behind at $728 million. Two other notable names rounding out the top five were Turkey and Spain. Quiet, little Finland was there for some reason. Other name filling out the list of top 10 were Brazil, Ukraine, Korea, Portugal and Japan: all names that have very valid reasons to be concerned about their future, and CDS traders agree. On the other end, rerisking was rampant in Mexico, Slovenia, Holland, Indonesia and Thailand. Most likely these are just hedge pairs as there is no reason why any of these names should be in play. Two names which we will focus on shortly, Romania and Bulgaria, were in no man's land. We expect they will slowly migrate toward the red part of the chart.

Nothing too surprising here today: Portuguese, Greek, and Spanish blowouts are now are daily occurrence... Except for the redness in the France column. On a day when the German 5 and 10 year Bunds are closing at record levels, seeing this kind of underperformance in French bonds can only indicate one thing: the barbarians at the gate have gotten past the periphery and are now closing in on the core.

Austria, the country most exposed to weakness in Central and Eastern Europe, is back on the radar. After having avoided skeptical investor scrutiny even as the bulk of Europe was collapsing all around it, the country is today's top CDS widener, yet still stunningly trades inside of France and Belgium. Look for this spread to blow out over the next week. Then again, the biggest CDS wideners are precisely the countries formerly seen safe: Austria, France, Germany and Belgium are all the top movers in CDS. So much for the whole North vs South division in Europe.

For the 4th week in a row, the UK is a top derisking name not just in sovereigns but in all DTCC tracked names. With $385 million in net notional derisking, in 227 contracts, the UK was the top 2 derisking name, with the surprising appearance of Brazil in the top spot at $460 million. Far less surprising was the 3rd name on the list: France continues to be in the top 5 derisking names week after week. Other notable names that complete the top 10 deriskers: Argentina, Germany, Australia, Korea and Japan. And the proof that corporates are now secondary to gambling in sovereigns, the top corporate derisking name, Enel SPA came in at a mere 191 million in notional, a ways away from the top three, all consisting of sovereigns. The same is true on the rerisking side, where of all 1000 names, the top 5 reriskers were all sovereigns (Italy, Spain, Portugal, Greece and Austria).

The country that Zero Hedge has long claimed is the glossed over black sheep that will take down the core of the eurozone is about to be downgraded. At least that's the case according to the latest flurry of market rumors. EURUSD now moving 10 pips with each trading block... and not higher. Look for support somewhere in the mid 1.23s.

If you were wondering why the market is spooked by rumors that Germany may be returning to the DM, here is actual fact that French President is on the verge of reinstating the franc. And with that, the euro is nothing more than a political toy for Merkel, Sarkozy and whoever the current non-indicted head of the Italian government is, to achieve their political goals. The currency is now dead. Parity coming within a few weeks.

Update: Germany now officially joins the fray: Euro zone central banks have
started buying government bonds, Germany's Bundesbank said on
Monday. "We confirm this," a Bundesbank spokesman said. From Reuters.

From Market News: "The Bank of France has begun buying eurozone government bonds, a spokeswoman confirmed Monday, without giving further details." Can't have those French banks face reality now can we. 65 years after France was saved from fascist rule, America has saved its financial system again from insolvency, and instituted something else. What that "something else" is, we are not quite sure yet, but gradually we are getting a sense.

Portugal... Spain...Greece...these are all last week's news based on CDS trading patterns. Indeed, this week saw the biggest trade unwinds of all top 1000 CDS entities (including all corporates) precisely in these three names. As the PIIGS implosion is finally being appreciated by everyone and their grandmother, the "speculators" are booking massive profits: the net cover/rerisking in Portugal and Spain was a massive $500 million net notional unwinds in each in the week ended April 30. Also known as taking profits. Greece and Ireland were also in the top 5, so as we have repeatedly claimed, the market will no longer make the news in Club Med. So where will it? No surprise there - the UK, France and Germany. The smartest money in the world is now actively betting the core of the eurozone is where the next CDS blow up will take place. With a stunning $630 million, $558 million and $370 million in net notional derisking, France, UK and Germany are the top three most active recipients in negative bets in the prior week, not just in sovereigns but in all names. The greatest non-sovereign derisker in the last week? Goldman Sachs, with $175 million. Nuff said. Yet a tangent on the UK: last week the UK saw $443 million in net notional derisking.  This week the number is even higher: $558 million. There is now over $1 billion in net risky bets made that the UK may not last. And Zero Hedge's outside bet to be the first core country to blow up, thanks to its massive PIIGS exposure, France, finally made the top spot in net derisking, with $629 million in net notional, or 189 contracts. The smart money is now massively betting that Europe's core is done for; as the PIIGS have demonstrated, the blow out in spreads for the core trifecta can not be far behind.

Gee, what a shock - the country which is most on the hook should Greece blow up is now issuing ultimatums. What is funnier is that the object of the ultimatum is none other than France wartime buddy Germany. From Reuters: "The European Union must immediately implement its previously agreed 30 billion euro ($39.96 billion) aid package for debt-stricken Greece, French Prime Minister Francois Fillon said on Wednesday. "We must immediately put in place the 30 billion euros," Fillon told France's lower house of parliament. He added he had "no doubt" that German Chancellor Angela Merkel would adopt the same position as France, concerning Greece." France has about 75 billion reasons to be terrified that Germany will leave it in the dust. Hey Birnbaum: we are better buyers of French CDS in size. We don't care if Goldman is on the other side of the trade.

The bottom is about to fall out for Goldman. First Reuters reports that Deutsche CEO Josef Ackerman will be asked to testify in relation to the near-collapse of German IKB, a bank that has gained sudden notoriety for being implicated in the alleged Goldman CDO fraud as a dumb buyer of anything pitched to it. As Deutsche Bank has previous been blamed for the near-collapse of IKB by its former CEO Stefan Orstfein, would not be surprised if Josef takes this chance to join the "blame Goldman" bandwagon to deflect attention from himself. Ironically, Deutsche Bank is certainly not without blame as its CDO-desk managed by just departed Greg Lippmann was one of the powerhouses in arranging Abacus-type deals in the 2005-2007 time period. And inseparate news, again Reuters notes that France is the latest, after Germany and the UK, to "mull" a Goldman probe. Whether British, French and other German companies will follow in BayernLB's footsteps and stop trading with Goldman remains to be seen. Certainly, there is an element of politics to all such actions, and political players in Germany and the UK are most in need of populist electoral boosts, while France not so much, at least for the time being.

CDS traders were prescient in snapping up Greek and Dubai CDS long before anyone else realized the risk these countries are in (well, more like Goldman selling CDS to some very close clients, wink wink). In exchange for figuring out what it took cash bond holders months to understand, these 'speculators' made a lot of money and in the process got branded as quasi-sovereign terrorists. Well, Greece can sleep well: according to the latest DTCC CDS data (for the week ended April 9), CDS specs have completely deserted Greece, which saw the single biggest amount of Net Notional CDS decrease, to just over $8 billion, a reduction of $367 million in the prior week (which means all the widening in Greek spreads is now, and has been, just cash bond sales, precisely what Zero Hedge has claimed all along). CDS traders are now focusing their attention on the one country which has so far slipped under everyone's radar, yet which we disclosed is more on the hook in terms of Southern European exposure than even Germany: France, with $781 billion in total claims. Should Greece topple the PIIGS dominoes, France will implode. And this is precisely what CDS traders are betting on now, taking advantage of absurdly tight France CDS levels. Also, just in case they are wrong on France, Spain and Portugal, not surprisingly, round out the top three names in which Net Notional saw the largest increase. Also not surprisingly, Japan rounds out the top 5 deriskers.

Here is one reason why Europe, while doing everything it can to make it seem (politically) like a bailout of Greece is out of the question, is and will continue to do all in its power to prevent a domino effect within the PIIGS countries: actually make that 1.5 trillion reasons. According to the IMF, the total amount of foreign claims, in this case focusing on Southern Europe countries, better known as PIIGS, on European international banks is $1.54 trillion. And while many have claimed that Germany would stand to lose the most from an implosion in the European periphery, that is in fact not true true: with $781 billion, France has much more at stake than Germany, whose banks have "just" $522 billion in "Southern European" claims. And while the IMF cut German GDP forecasts in large part due to the country's exposure to Southern Europe, it appears that France is next on the chopping block.

The latest stunner from the CIA and the Obama administration via Wikileaks. To wit: "This classified CIA analysis from March, outlines possible PR-strategies to shore up public support in Germany and France for a continued war in Afghanistan. After the Dutch government fell on the issue of dutch troops in Afghanistan last month, the CIA became worried that similar events could happen in the countries that post the third and fourth largest troop contingents to the ISAF-mission. The proposed PR strategies focus on pressure points that have been identified within these countries. For France it is the sympathy of the public for Afghan refugees and women. For Germany it is the fear of the consequences of defeat (drugs, more refugees, terrorism) as well as for Germany’s standing in the NATO. The memo is a recipe for the targeted manipulation of public opinion in two NATO ally countries, written by the CIA. It is classified as Confidential / No Foreign Nationals."