As much as we hate to say it, Europe is now without a shadow of a doubt the new AIG, only this time such heretofore considered insane (in retrospect) activities as doubling down to infinity on ones TBTF status are out in the public record for all to see. At least AIG conducted Joe Cassano's "made in London" $2.7 trillion bet on home prices never dropping in the shadows of Curzon 1. Whereas two days ago we made it clear how the unwind of trillions in rehypothecated securities could be the avalanche that buries first Europe and then the world, we explicitly excluded the impact of synthetic products such as CDS. Now it is time to bring the picture full circle, and put CDS front and center. As Bloomberg reports, "BNP Paribas SA, France’s biggest bank, sold a net 1.5 billion euros ($2 billion) of credit- default swaps on the nation’s sovereign debt, according to data compiled by the European Banking Authority. UniCredit SpA, Italy’s biggest lender, and Banca Monte dei Paschi SpA are net insurers of more than 500 million euros each of their government’s bonds, and Oesterreichische Volksbanken AG, the Austrian lender which has yet to pay interest on 1 billion euros of state aid received in 2009, has guaranteed a net 839 million euros of its national debt, EBA data show." (EBA source - link). For those confused by the above, here is the explanation: European banks, in order to generate modest cash flow from collecting on the pariodic interest premiums owed to them in order to plug increasingly large capital shortfall holes that otherwise would simply keep growing ever larger, have sold and continue to sell massive amounts of default protection on their very own host countries! As a reminder, it was precisely this that destroyed AIG when the illusion of the credit bubble burst.