Bridgewater Unveils New $700 Million Short

Tyler Durden's picture

While in recent days Bridgewater has been in the news not for its investing acumen (or lack thereof), or the outspoken, contrarian views of its founder Ray Dalio, but rather the recent spirited attack by Jim Grant who in not so many words hinted, if not explicitly stated, that there is something very rotten in the state of (Westport) Connecticut, it is still the case that any major investing move the hedge fund... pardon the algo-driven investing hedge fund with no prime brokers and lots of ETFs, makes is sure to result in headlines, and today was no exception, because as Bloomberg reports, Bridgewater has amassed a "$713 million wager against Italian financial stocks, its biggest disclosed bearish bet in Europe."

In addition to shorting five banks and one insurer, public filings disclose that the $160 billion hedge fund is also betting on a decline in the stock price of Milan-based Prysmian SpA, the world’s largest cable maker.

Bridgewater’s biggest short is against Intesa Sanpaolo, followed by UniCredit and insurer Assicurazioni Generali, all names very familiar to anyone who covered the endless European crisis from 2010 until the launch of QE by the ECB, and which were constantly on the verge of collapse.

While it is unclear what may have prompted the recent bearishness at the world's biggest hedge fund, it likely has to do with recent proposed revisions to the ECB's treatment of bad debt held on bank balance sheets. Under the ECB’s new proposal, banks will have to provision against the entire potential loss on newly-classified nonperforming loans that aren’t backed by collateral after two years. While details are still scarce and the ECB has promised to publish plans for existing bad loans, including “appropriate transitional arrangements,” by the end of the first quarter, Italian banks are expected to be hit hardest by the revised treatment of NPLs.

Why Italy? Because the country’s banking industry remains saddled with €318 billion in bad loans - a third of Europe’s total. Indeed, concerns about the impact of the ECB's bad-loan proposal on the  earnings of European banks, prompted a 7% percent drop in an index of Italian banks in the six days through Tuesday, pulling Italy's FTSE MIB Index down from two year highs. Italy’s FTSE Italia All-Share Banks Index has dropped 4.5 percent since the ECB's Oct. 4 announcement that it plans to revise bad loan provisioning standards.

Various (mostly long-only) investors were quick to defend Italian banks, suggesting that the ECB proposal is a tempest in a teapot:

“The market over-reacted because the ECB’s new rule is only for new non-performing loans,” said Ronald Petitjean, a fund manager at LA Francaise Inflection Point. “An improving macro will lead to a marked improvement in banks’ asset quality,” he said, adding that the rule is unlikely to be applied to existing bad loans.

“After UniCredit’s huge capital increase, the Monte dei Paschi resolution and the solution on Veneto’s banks, the terrain is becoming more fruitful, unless the ECB kills it,” Matteo Brancolini, a fund manager at BPER Banca SpA, told Bloomberg. “This ECB rule will only affect Italian banks. But I do think they will find some compromise on the issue.”

As Bloomberg reported yesterday, the European Commission on Wednesday helped reduce concerns, saying in a report that it considered introducing new provisioning policies on soured debt arising from newly-originated loans and not from the existing pile of loans. The commission didn’t define specific provisioning policy and limited the impact of the ECB proposal to individual cases.

“The European Commission has clarified the limit of the SSM mandate and implicitly reduced uncertainty on the treatment of the back book,” Mediobanca SpA analysts led by Andrea Filtri wrote in a note. “Overall, perceived regulatory risk in Italian banks should reduce, for now.”

Others remain skeptical. "Italian banks may face higher loan losses as well as potentially being discouraged from lending", according to Societe Generale SA analysts including Aldo Comi. While most countries on the ECB’s Supervisory Board support giving banks firm deadlines for setting aside cash to cover potential losses from uncollected loans and loan payments, Italy and some others are said to be pushing back.

For now at least, the market seems to agree with the bearish view: in addition to Bridgewater, more investors have pounced ahead of the recent drop in Italian bank stocks. As Blomberg notes, "the trend is a reversal from the third quarter, when Italian banks were among Europe’s best performers as the rescue of Banca Monte dei Paschi di Siena SpA and the liquidation of two smaller regional lenders reduced the systemic risk of the nation’s financial system." Marshall Wace and Oceanwood Capital Management are among other hedge funds shorting Italian lenders.

What happens next?

“The Italian market will be a beta market this year and next year,” said Brancolinim, fund manager at BPER Banca. “If Europe keeps improving -- and that is an unknown -- Italy will outperform. That’s true also on the opposite. Italy needs some European political and economic stability.”

Of course, it's not just Italy, because as Reuters writes overnight, "German and French banks have together amassed almost 230 billion euros ($272 billion) of bad loans, according to regulators' data, underscoring the scale of a problem often linked solely to Italy that is now causing worry across the region."

The tally puts the combined total of problem loans in the euro zone's largest economies, France and Germany, close to that of Italy's bad debt pile.  It lays bare the extent of the pan-European problem although it is far easier for banks in France and Germany to cope with because bad debts there account for a smaller proportion of overall credit.

For now however, Bridgewater's algos appears to only be concerned with the situation in Italy. As for the investment, this provides yet another opportunity for Ray Dalio to refute Jim Grant's allegations: should the trade outperform, the billionaire hedge fund manager will finally have a P&L hit to point to and say "see, we aren't charlatans." The problem is that for that to happen, the ECB would have to close its eyes and allow havoc and mayhem to be unleashed in Italy - and Europe - again, as the banking sector remains the continent's weakest link which can't exist without constant central bank support. 

Neddless to say, the ECB won't do that, which is also why our money is, once again, on Grant.

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spastic_colon's picture

why would they "unveil" this??

Pinto Currency's picture

According to James Grant, Bridgewater should short Bridgewater.

Stuck on Zero's picture

By revealing this position the Italian government could jump in an make an easy $700M.

Bay of Pigs's picture

Yes. Interesting timing isn’t it?

Someone is going to get cornholed on this deal.

Miss Informed's picture

That might have been what happened to the dinosaurs. They kept getting bigger and bigger as the big ones ate the small ones. In the end only the biggest ones were left and they died because there was nothing left to eat. Except themselves.

Soph's picture

Well, if you're as big as Bridgewater, telling the world you're short on a market segment does stand a good chance of putting downward pressure on that sector as others jump in on the short side.

Rainman's picture

The easiest way to return from a casino with a small fortune: go there with a large one. 

Miss Informed's picture

Just like a washing machine, first you load it by placing your bet, then in the end you spin to try to get everyone else to buy in.

rex-lacrymarum's picture

I'm pretty sure the disclosure is mandatory. 

small towel's picture

In these markets dogs and cats are interchangable.

RagaMuffin's picture

If the EU/ECB can clamp down on the channels that Dalio used to short the Italian banks Dalio will become Smallio.......

lew1024's picture

There is a bit of chicken-and-egg here.

Big bets kill big companies, but are often the last option to avoid bankruptsy.

RationalExuberance's picture

This position is most likely hedged, so it's not as large as it appears, especially for a $160B hedge fund. 

myorouter's picture

If italy falls so willthe world financial system.  And italy will fall.  Just ask any frenchman. 

Hkan's picture

Overlooked is deeply rooted corruption mentality in southern europe. Making any regional bets....not fully understanding it...is pure gambling...

hsun85's picture

hmm, let me buy some Calls.

PontifexMaximus's picture

never underestimate the firepower of “the one italian” in frankfurt

Miss Informed's picture

The one who is always shooting himself in the foot?

Secret Weapon's picture

I think I will buy Dalio a snorkle for Christmas.  His firm is so far under water he will need it. 

Miss Informed's picture

People really give this guy their hard earned money to do this shit? No love for this kind of speculator betting on people losing their savings, their jobs, their homes, so he can go up a couple of places on “the worlds richest hedge fund manager” list.

Solio's picture

Ray's short what? It sounds like a personal problem.

falak pema's picture

Shades of 2010 when the US HF cleaned out Club Med from London...

Now its Bridgewater's turn to go for the Italian Achilles heel.

Draghi and Mutti have to agree as this is a turning point in the financial battle that is not winner takes all but could be EU loses all...

Will Mutti let US finance run amock in Habemus Papam land?

Rodders75's picture

Best thing Dalio can do: persuade Gartman to go long

wherewasi's picture

Is Corzine involved here?

assistedliving's picture

Puerto Rico without the hurricane...but with lots of amazing Art

LeftandRightareWrong's picture

This short could get crushed!  The banks and central bankers have Gold Cards with no limits, no pay back dates, and zero (or negative) interest rates.

Iconoclast's picture

Bad bet, Europe’s banks are seriously undervalued vis a vis their American counterparts.