Romania

Several days after the Romanian parliament passed a law to cut pensions by 15% in order to qualify for a critical $20 billion IMF loan, the Romanian Supreme Court found this law was not only unconstitutional, but unappealable (along the lines of what our own SCOTUS will do once the Fed's transparency appeal gets to the very top, resulting in confirmation once and for all that American laws are only made for the benefit of the Federal Reserve). The decision was reached hours after dozens of Romanian citizens stormed the presidential palace "to get an audience with President Traian Basescu." As a result of the Constitutional Court's decision, the IMF loan "may now be delayed, and this will be a big blow to the government of Prime Minister Emil Boc, the BBC's Nick Thorpe reports." Also as a result, Romanian (and by association, neighboring Bulgaria) CDS blew up today and closed +30 to 410 for Dracula's host country, and +20 to 360 bps for the country that served as the reverse engineering center of the former Communist Bloc.

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.

Time to buy some peripheral European CDS - As our friends at Kerrisdale Capital point out, "There’s been a lot of talk recently about Hungary following in Greece’s footsteps and potentially defaulting on its debt. Bulgaria and Romania are two other weak economies in Eastern Europe, and the chart below shows bank exposure by country to Bulgaria, Romania, Hungary and Greece. The situation in Greece could make it difficult for Bulgaria and Romania to roll over their debt, an event which would in itself reduce the value of Greece’s assets, creating further difficulty for Bulgaria and Romania."

You would think if someone is willing to handle the Gulf oil clean-up with equipment and technology not available in the U.S., and finishes the job in shorter time than the current estimate, the U.S. should jump on the offer. But it turned out to be quite the opposite.

The idiocy in Europe knows no bounds. Just as the EURUSD was about to stabilize a little, and we use the term very loosely, Italy comes out and announces that due to its Robin Hoodesque task of rescuing Greece, and the need to shore up even more liquidity, that it would increase its bond issuance to €240-250 billion. As Market News reports: "Italy’s contribution to the EU’s Greece aid package is E14.736 billion out of a total E110 billion package from the EU and IMF, under the three-year economic and financial policy program. This year’s contribution is estimated to be around E5.4 billion. The first tranche of this loan E2.921 billion was paid in early May." Alas, unlike in the US where every new trillion in bond issuance
somehow results in a 50 bps tightening in the 10 year, Italy is not
quite so lucky. The result of this announcement: new all time high for Italy 10 year Bund spreads at 173 bps. And it doesn't end there: Reuters has just reported that talks between Sarkozy and Merkel, previously scheduled for today, have been rescheduled for June 14 (and probably cancelled as the two European leaders can't stand each other any longer) - is it all now falling apart in Europe behind the rosy rhetoric?

If you owned a Hungarian bond here and you found a bid you would hit it wouldn't you? So should everybody, and then comes Romania with a recently failed auction, and then Ukraine which already received one round of bailout and will clearly need more. Then comes Western Europe, even Germany with its exposure to Eastern Europe, Japan... If dominos start falling it will be nearly impossible to stop them unless theree is enough private wealth left at one point to back specific sovereign entity. With the overall leverage in the system that could mean very few people, though Japan has proved resilient for that very reason despite a huge debt-to-GDP ratio. And even though 4 PMs in 4 years shows that public opinion is losing its discipline in the empire of the rising sun, their politicians still have the good taste of resigning. This is the kind of event that can be the spark of a global systemic crash that would leave very few standing if any. Any optionality in an investment portfolio should be to the downside and there is a good chance a lot of bets would not be honored under that scenario. Cash, Gold, and maybe guns seems sadly to be the answer. Many will say once again that I am not very cheerful and would not make for a very good guest at a dinner or a conference, but it is looking for short term good news at the expense of any critical thinking or hard work that got us there in the first place so that will only help me make my point. - Nic Lenoir

Earlier we predicted that the dirt in Eastern Europe is about to clog up Bernanke's liqduity swap Hoovermatic, but had no idea we would be proven quick so fast. Romanian website zf.ro reports that in a 600 million lei auction conducted earlier, the "Public Finance Ministry has rejected all bids submitted considering them an unacceptable level of offer price." In other words, the Romanian government now thinks it is Greece and it doesn't need money it finds too expensive. In yet other words, this means a failed auction. This follows the news of a semi-failed auction in Hungary earlier today, and a busted auction in Germany two weeks ago. Does anyone know if there is an iPad app that magically makes direct bidders appear whenever and whereever needed, leading to a 10x Bid To Cover at 0.00% for any bond auction? If Jobs can come up with that, we would immediately bet the concrete bunker on AAPL stock.

Openeurope.org.uk has put together a paper of the most blatant half-truths, propaganda, and outright lies, abused by Europe not only over the past month, but also over the past 10 years, for the entire duration of the now rapidly collapsing eurozone experiment. As the paper notes: "More than ten years since the euro was launched, and with the single currency facing its greatest ever crisis, the parameters have radically changed. Amid all the uncertainty, one thing has become painfully clear: the EU elite simply got it wrong on the euro." The authors demand for "a call for greater honesty about the future of European cooperation and a reminder of the urgent need to find a new model that is both politically and economically sustainable" is just as valid in Europe as it is in the US: any system based on lies and opacity is doomed to failure. Europe found this out the hard way. We will too unless somehow we restore the basic truths like transparency, honesty and integrity, instead of merely campaign promises and teleprompter soundbites.

As of early this morning, all of Europe is plunging, not just the euro but all non EMU currencies as well: the EURUSD was in the mid 1.24 range, the GBPUSD is about to breach 1.45, while the Polish Zloty and Hungarian Forint are tumbling. Guess who is up: Gold, surging by over 1.2%, and at $1,245 at last check. The LBMA attempt to contain gold has failed and the market is preparing for a second assault on the $1,250 big resistance, whose take out will next take gold to $1,500. And while Greece is striking again, now the European core is accelerating the squeeze of the periphery: Romania is slashing its government budgets by 25%, and its pensions by 15%, which has resulted in immediate protests. We expect to see many more signs that the Greek contagion is only now spilling over into the social sphere.

With its CDS at 875, today, Greece is riskier than dictatorical (but Fed Free) Venezuela and perpetually bankrupt Argentina. All the hedge funds who went long Greek bonds with or without protection are getting destroyed. And some very prominent names did. We are waiting for the latest HSBC report to confirm this.

Country         Spread       CPD

• Greece:       874.22      50.66
• Venezuela:   841.28     44.57
• Argentina:    832.50     43.17
• Pakistan:      708.40     38.22
• Ukraine:       601.41     34.24

EuroControl reports that of 28,000 European flights expected on Monday, just 8-9,000 will actually take off: 70% cancellations for third day in a row, five days of major air traffic disruptions. At what point will this impact Obama's bold New Export Economy plan?

Watch volcanic ash diffusion in super slo-mo, as EuroControl reports: "At the current time, air traffic control services are not being provided to civil aircraft in the major part of European airspace. This includes Austria, Belgium, Croatia, the Czech Republic, Denmark, Estonia, Finland, most of France, most of Germany, Hungary, Ireland, northern Italy, the Netherlands, Norway, Poland, Romania, Serbia, Slovenia, Slovakia, north Spain, Sweden, Switzerland, Ukraine and the UK."

Romania, Azerbaijan, and Georgia on April 13, 2010, took a major step toward the implementation of a substitute energy distribution network to substitute for the US-backed Nabucco strategic gas pipeline complex.

Azerbaijan Minister of Industry and Energy Natik Aliyev, Romanian Minister of Economy, Commerce and Business Environment Adriean Videanu, and Georgian Energy Minister Alexander Khetaguri met in Bucharest to sign a new agreement in the gas sector. The new agreement constitutes an expansion of the late February agreement that was limited to LNG exports to Romania. The new agreement set forth modalities for exporting LNG to the rest of the European Union (EU) via Romania. The new project will now be known as the Azerbaijan-Georgia-Romania-Interconnection project (AGRI).

The April 13, 2010, agreement also included specific modalities for the joint construction of two terminals to transport natural gas from the Caspian Sea to Europe across the Black Sea, as well as the setting up of an AGRI headquarters in Bucharest in the next few months.

Even as Bank of America is preparing to restart securitization and thus provide the single greatest gift to creditors the world over, as this is merely the first step in wiping out/transferring yet more trillions in private sector debt, it has done the public a bigger favor by compiling the following list of key terms for all those lost in the current labyrinth of definitions,acronyms and euphemisms. Since following the Goldman legal plight will require a facility with some heretofore quite complex constructs, the following catalog is a must read for all financial novices.

The latest update from EuroControl confirms that ongoing European air travel closures will likely have dramatic economic consequences. According to today's update from the flight control agency expects approximately 5,000 flights to take place today in European airspace. Normally, 22,000 are expected. (17k cancelled). Airspace restrictions have impacted most Northern and Central europe, including: Austria, Belgium, Croatia, the Czech Republic, Denmark, Estonia, Finland, most of France, most of Germany, Hungary, Ireland, northern Italy, the Netherlands, Norway, Poland, Romania, Serbia, Slovenia, Slovakia, Sweden, Switzerland, Ukraine and the UK. EuroControl also notes that approximately 600 trans-Atlantic flights still take place each day, 300 in each direction. 73 flights arrived in Europe this morning. We are confident economists around the world are working furiously to estimate the GDP impact on the Eurozone as a result of this material outlier. First Easter, next Cesar Chavez day, now it is only logical that natural earth processes will be used to blame for the failings of Keynesianism.