Ray Dalio Is Shorting The Entire EU

Tyler Durden's picture

Authored by Raul Ilargi Meijer via The Automatic Earth blog,

A point BOE Governor Mark Carney made recently may be the biggest cog in the European Union’s wheel (or is it second biggest? Read on). That is, derivatives clearing. It’s one of the few areas where Brussels stands to lose much more than London, but it’s a big one. And Carney puts a giant question mark behind the EU’s preparedness.

Carney Reveals Europe’s Potential Achilles Heel in Brexit Talks

Carney explained why Europe’s financial sector is more at risk than the UK from a “hard” or “no-deal” Brexit. [..] When asked does the European Council “get it” in terms of potential shocks to financial stability, Carney diplomatically commented that “a learning process is underway.” Having sounded alarm bells about clearing in his last Mansion House speech, he noted “These costs of fragmenting clearing, particularly clearing of interest rate swaps, would be born principally by the European real economy and they are considerable.”

 

Calling into question the continuity of tens of thousands of derivative contracts , he stated that it was “pretty clear they will no longer be valid”, that this “could only be solved by both sides” and has been “underappreciated” by Europe . Carney had a snipe at Europe for its lack of preparation “We are prepared as we should be for the possibility of a hard exit without any transition…there has been much less of that done in the European Union.”

 

In Carneys view “It’s in the interest of the EU 27 to have a transition agreement. Also, in my judgement given the scale of the issues as they affect the EU 27, that there will ultimately be a transition agreement. There is a very limited amount of time between now and the end of March 2019 to transition large, complex institutions and activities…

 

If one thinks about the implementation of Basel III, we are alone in the current members of the EU in having extensive experience of managing the transition for individual firms of various derivative and risk activities from one jurisdiction back into the UK. That tends to take 2-4 years. Depending on the agreement, we are talking about a substantial amount of activity.” [..] “I wouldn’t want to use financial stability issues as leverage. I wouldn’t want them to be addressed in a bloodless technocratic way in the interests of all the citizens.”

Sounds like Carney knows a thing or two that Juncker et al haven’t sufficiently thought through. The EU plans to move all – or most- derivatives clearing to the continent, but such a thing is anything but easy. That’s another very tangled web, and an expensive one to boot. Brussels probably wants to use the issue to put pressure on London in some way, but a hard Brexit might make that unlikely if not worse. Bloomberg from June this year:

EU Targets Derivative-Clearing Giants With Relocation Threat

“Today, a significant amount of financial instruments denominated in the currencies of the member states are cleared by recognized third-country CCPs,” according to the proposal. “For example, the notional amount outstanding at Chicago Mercantile Exchange in the U.S. is €1.8 trillion for euro-denominated interest-rate derivatives,” the commission said. “This also raises a series of concerns.”

 

The financial industry has lobbied hard against a location policy. The International Swaps and Derivatives Association said requiring euro-denominated interest-rate derivatives to be cleared by an EU-based clearinghouse would boost initial margin requirements by as much as 20% . The FIA, a trade organization for the futures, options and centrally cleared derivatives markets, has said forced relocation “could nearly double margin requirements from $83 billion to $160 billion.”

According to that Bloomberg piece, the notional amount outstanding of euro-denominated OTC interest-rate derivatives is some $90 trillion, 97% of which goes through the London Clearing House (LCH) based in .. well, you guessed it. Wikipedia:

LCH is a European-based independent clearing house that serves major international exchanges, as well as a range of OTC markets. Based on 2012 figures LCH cleared approximately 50% of the global interest rate swap market, and is the second largest clearer of bonds and repos in the world , providing services across 13 government debt markets.

 

In addition, LCH clears a broad range of asset classes including: commodities, securities, exchange traded derivatives, credit default swaps, energy contracts, freight derivatives, interest rate swaps, foreign exchange and Euro and Sterling denominated bonds and repos. LCH’s members comprise a large number of the major financial groups including almost all of the major investment banks, broker dealers and international commodity houses.

More details from Reuters, also in June:

Derivatives Body Warns EU Against Moving Euro Clearing From London

Shifting clearing of euro-denominated derivatives from London to the European continent would require banks to set aside far more cash to insure trades against defaults, a cost that would be passed on to companies, a global derivatives industry body says. [..]The London Stock Exchange’s subsidiary LCH currently clears the bulk of euro-denominated swaps, a derivative contract that helps companies guard against unexpected moves in interest rates or currencies.

 

Britain, however, is due to leave the bloc in 2019, putting it out of the EU’s regulatory reach. The International Swaps and Derivatives Association (ISDA), one of the world’s top derivatives industry bodies, said on Monday that a “relocation” in euro clearing to continental Europe would split liquidity in markets and reduce the ability of banks to save on margin by offsetting positions in the same liquidity pool.

Deutsche Bank has the world’s largest derivatives portfolio. Not all of it will be euro-denominated, but still. And I know it’s just notional amounts, but derivatives are not things one plays fast and loose with, lest the clearing becomes opaque and trouble starts.

Juncker better solve this thing. Oh, and this one too (yes, it’s quite fun to report on this):

Money Will Divide Europe After Brexit

As part of the transition period of around two years that she called for in her emollient Florence speech last month, Britain would continue to pay in to the EU budget to ensure that none of the member states was out of pocket owing to the decision to leave. These net payments of around €10 billion a year would fix the immediate problem facing the EU, the hole that would otherwise open up in its finances during the final two years of its current budgetary framework, which runs from 2014 to 2020.

 

[..] through its accounting procedures, the EU can and does commit it to spending that will be paid for by future receipts from the member states. What this means is that even after 2020 there will still be payments due on commitments made under the current seven-year spending plan. That pile of unpaid bills, eloquently called the “reste à liquider” (the amount yet to be settled), is forecast to be €254 billion at the end of 2020.

 

Estimates of what Britain might owe towards this vary, but taking into account what might have been spent on British projects it could be around €20 billion. On top of that – and the second main reason why the EU is holding out for more – the EU has liabilities, notably arising from the unfunded retirement benefits of European staff estimated at €67 billion at the end of 2016, which it is expecting Britain to share. Even taking into account some potential offsets from its share of assets, Britain may face a bill of between €30 billion and €40 billion on top of the €20 billion paid during the transition period.

The EU finances itself on the fly. It’ll have a €254 pile of unpaid bills in 3 years time. That is scary. Not for Brussels, but for its member countries. A hard Brexit, in which Britain may refuse to pay, is perhaps even scarier.

Anyway, once Juncker’s done with all that, he’ll have to move on to the next problem.

Derivatives is a big cloud hanging over Europe, but this one is potentially shattering.

Ray Dalio, manager of the world’s biggest hedge fund, is shorting, placing large bets against, anything Italian, and given Italy’s size and hence importance to the EU, his bets are effectively bets against Brussels.

Dalio’s Fund Opens $300 Million Bet Against Italian Energy Firm

Bridgewater Associates is adding to its billion-dollar short against the Italian economy. The world’s largest hedge fund disclosed a $300 million bet against Eni SpA, Italy’s oil and gas giant, data compiled by Bloomberg show. Bloomberg previously reported that Ray Dalio’s firm had wagered more than $1.1 billion against shares of six Italian financial institutions and two other companies.

 

This latest bet is the hedge fund’s second-largest against an Italian company, trailing only the $310 million against Enel SpA, the country’s largest utility. Eni’s majority holder is the Italian government via state lender Cassa Depositi e Prestiti SpA and the Ministry of Economy. The public involvement also is reflected in the government’s role in appointing the chief executive officer. Current CEO Claudio Descalzi has been at the helm since 2014 and was reconfirmed this year.

$1.1 billion against the banking system, $310 million against the main utility, $140 million vs pan-European insurer Generali and now $300 million vs the national oil and gas company, That adds up to quite a bit more than the Bloomberg graph says, but I’ll include it anyway.

Dalio doesn’t call the bluff of Italy, and this is not just like George Soros’ shorting the British pound in 1992, he’s calling out the entire EU and its financial system.

He’s saying I don’t believe you can keep up the charade.

He’s making a mockery of Mario Draghi’s “whatever it takes”.

So what are Rome, Brussels and Frankfurt going to do? They can’t ignore the no. 1 hedge fund forever. They will have to pump money into Italy, in large amounts. Merkel won’t like that, neither will her new coalition partner FDP, and the Bundesbank may start legal action.

Dalio’s located the Union’s achilles heel, which is not just that Italy’s insolvent (it’s not alone in that), but that there’s a gigantic theater production being performed to give everyone the impression that things are going just swimmingly, thank you. So Dalio’s said: how much for a ticket to the show?, and paid it. And now he’s inside.

Bridgewater didn’t enter that theater for nothing. $1.85 billion is not chump change for them. Intesa Sanpaolo CEO Carlo Messina may have said that Dalio will lose his bets, but according to the IMF Italy’s non-performing loans levels were €356 billion at the end of June 2016, which is 18% of total loans for Italian banks, 20% of Italy’s GDP and one-third of total Eurozone NPLs. Intesa Sanpaolo holds a nice chunk of that.

‘Whatever it takes’ may well be too much to take for the EU, and Draghi looks outsmarted, as do Juncker and Merkel. How many billions will it take for Dalio to go away? And then, who’s next, which hedge fund, which politician, which ECB chief? Coming soon to a theater near you.

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b-sugar's picture

instead of that BS i'll simply buy the footsie, see you in a year? 

BabaLooey's picture

Ray Dalio is a globalist swine.

IF he is shorting the entire EU, he is one confused, fucked up, twisted fucker.

new game's picture

"fighting the fed" hmmm. can he print? thought so. face gone...

HenryKissingerZuckerberg's picture

the EU has liabilities, notably arising from the unfunded retirement benefits of European staff estimated at €67 billion at the end of 2016...

whoa Ghordius can explain this, EASILY

Ghordius's picture

lol. you seem to see me as a resource at your disposal ;-)

yes, it's a bad practice. but a common one

as a reminder, the EU has a budget of roughly 860 billion for a period of seven years

if you put the two numbers in proportion, in relation to each, you'll see that it's not a big issue. there is much worse, around

https://en.wikipedia.org/wiki/Budget_of_the_European_Union

HenryKissingerZuckerberg's picture

lol. you seem to see me as a resource at your disposal ;-)

well, you DO feed from the EUROcracy so we EUropeons could argue you are just another "public servant"/contractor

s a reminder, the EU has a budget of roughly 860 billion for a period of seven years

thank you, I could not find the numbers

Sir Edge's picture

 

I Am Confused... Why Would A Billion Dollar Hedge Fund REVEAL Their Book !

Their Big Trade Status... 

Seriously, this does not make sense... ?

Anybody... Bueller... Anybody

Edgey... 

Dr. Bonzo's picture

So, massive Can-Down-Road-Kicking exercises in capitals around the world, from Brussels to Beijing and everywhere in between.

Marc Faber will yet get his comeuppance. In the words of the infamous Faber...  "It's all going to blow up."

You're day is coming Marc. I might just fly down to Thailand just to pull up a chair with Faber at his favorite hangout in Chiangmai. Should have plenty of time on his hands these days. Poor bastard.

 

Der Libertäre's picture

Do not worry about Marc. He knew that "he who tells the truth needs a quick horse". He knew exactly what would happen, but sometimes a man has to do, what a man has to do. And real libertarians have not too many friends anyway. I speak own experience. ;-)

 

mkkby's picture

Not one of the gold bugs here, but if this story is correct Dragi will print. That means euro down, gold up.

He will certainly print, as he did during the Greece meltdown. Only thing is the timing. Markets can remain irrational longer than you can remain solvent.

Batman11's picture

The Euro was a complete fuck up from the start.

Someone has gone back and re-analysed the data to see what went wrong.

Usual suspects, banks and an idiot at the ECB, Trichet.

https://www.youtube.com/watch?v=B6vV8_uQmxs&feature=em-subs_digest-vrecs  

BabaLooey's picture

Just skip the first 13 minutes of that Batman....but excellent

Batman11's picture

Lots was hidden at the time but the data remains for re-analysis.

Alan “Kamikaze” Greenspan on how not to do tightening.

http://newsimg.bbc.co.uk/media/images/45089000/gif/_45089770_us_rates_oct08_226gr.gif

What have you forgotten Alan?

He’s forgotten the delays in the system.

There were delays while the teaser rate mortgages reset; the new mortgage repayments became unpayable; the defaults and other losses accumulated within the system until everything came crashing down in 2008.

The FED had tightened much too fast by not appreciating the delays in the system.

MoonSun's picture

He will still need to buy back those 300 million USD. Short squeeze...

SoDamnMad's picture

This going out to Marc and his followers:

“I have given my life to try to alleviate the sufferings of Africa.  There is something that all white men who have lived here like me must learn and know.  That these individuals are a sub-race. They have neither the intellectual mental or emotional abilities to equate or share equally with white men in any function of our civilization.  I have given my life to try to bring them the advantages which our civilization must offer, but I have become well aware that we must retain this status: the superior and they the inferior. For whenever a white man seeks to live among them as equals they will either destroy him or devour him. And they will destroy all of his work.  Let men from anywhere in the world, who would come to Africa, remember that you must continually retain this status; you the master  and they the inferior like children that you would help or teach.  Never fraternize with them as equals.  Never accept them as your social equals or they will devour you. They will destroy you. ”  Albert Schweitzer “African Notebook” 1939

So yank Schweitzer's Nobel prize for being a racist and while your at it pull Obama's for being a war criminal for bombing soverign countries that were no threat to the US.

Manipuflation's picture

Well fuck it.  There are a lot of nice motorcycles for sale out there.  I see it every day.  The only chick that rides bitch on my bike is my daughter.  The kids at her school call me the Terminator.  There will be no bullshit.  She can ride on my Harley but only her.  No one fucks with her.

https://www.youtube.com/watch?v=lYOoWCv_PYE

 

1 Alabama's picture

I just ride down hollywood blvd w/the windows down, i pick up moore daughters that way than any harley could.

BritBob's picture

 The EU is like the Eurovision Song Contest

The ESC is often viewed as a driver of changing conceptions and realities of Europe and Europeaness since the fall of the Berlin Wall. It is also important to note that the contest itself is framed as a contest between nations (not of particular singers). The contest is a symbolic contact zone between European cultures (Fricker and Gluhovic, 2013:3). However, this never happens without problems. Each year the debate about politics of the contest reoccurs. Many viewers wonder – ‘Is Eurovision still about the music?’ (Perhaps- was it ever about the music?)

Both are long past their sell-by date.
ThinkAgain's picture

The ECB should redirect their focus away from propping up financials and governments, completely focusing on the real economy: doing BCS (http://www.planck.org/publications/BQE-Bilateral-Currency-Swaps) instead of FQE Financial QE or GQE Govermental QE. Making the (lousy) Euro project yet viable is possible: but than they have to leave the defensive mode and go for/into an offensive mode: http://www.planck.org/publications/Making-The-Euro-More-Offensive. Full focused on production, infrastructure, water and energy: the real stuff instead hunting inflationary/worthless financial paper. And yes: Europe should abandon taxation of labour: it's madness in a globalized economy: labour taxation a job killer pur sang. See http://www.planck.org/publications/Labour-Taxation. Will they do it? No. They lack both the ideas and the leadership. A pity.

ludwigvmises's picture

Jim Grant told us there's reason to believe Dalio operates a ponzi scheme. So a ponzi schemer is saying he is shorting "All of Europe". Tells me we should take the opposite side of the trade.

back to basics's picture

A big ponzi scheme is shorting a much much bigger ponzi scheme within the confines of the global financial massive ponzi scheme. Clear now? 

doctor10's picture

The EU is a 20th century anachronism.  The world will commence the 21st century only when it is washed away

bustdrs's picture

Ray "Bernie" Dalio may need a big win to plug a few holes???

 

Ghordius's picture

scraping the bottom of the barrel? LOL. bring it on!

what a great chance to get rid of most derivatives in the eurozone, btw
for 70 years, they were... forbidden. then 1999, a megabanker lobbied to have them back. later, he admitted it was... unwise. he never went into their moral aspect, but hey, he' a megabanker
and a great chance to cut that monstrosity, DB, in pieces

(note, in this, what just happened when Boing pushed for tariffs on Bombardier. note the recent results. note... the EU's little darling's Airbus role in Jobs both in NI and the US)

pass the popcorn, please. Brexit is a gift that keeps giving

back to basics's picture

Brexit is the first lethal blow to that appalling authoritarian construct called the EU (aka 4th Reich). You need to get over it if you want your pseudo intellectual posts not to sound more and more bitter, stressed and poorly thought out than they usually are. 

Ghordius's picture

authoritarian? -> Four Freedoms

give me, just once, an argument. an intellectual one is ok

what I read from you is only predictions and personal attacks, i.e. ad-homs

OverTheHedge's picture

Greece.

Does that work for you as an example of authoritarianism?

GreatUncle's picture

... and all those bailout countries that are really going nowhere with the level of debt they hold when going bust or devaluing your own currency allows the next generation to have a chance.

prmths2's picture

"authoritarian? -> Four Freedoms?

give me, just once, an argument. an intellectual one is ok"

Freedom #3:  Freedom  from want " is understood to establish a minimum entitlement to food, clothing and housing at an adequate level."

As a practical matter in contemporary society, if one person is entitled to something such as clothing and housing, someone else must provide it. Again, as a practical matter, altruism is insufficient to guarantee the provision of entitlements and an authoritarian entity must exist if entitlements are going to be fulfilled. Freedom #3 is in effect a variation on "from each according to his ability, to each according to his need." Ultimately, an authority is required to determine abilities and needs.

Doom and Dust's picture

The EU will just have to import the expertise and talent. There's nothing special about the UK to make it exclusively suited to financial services.

Carney is just talking the country up because talk is all he has left.

back to basics's picture

Wrong 

Carney is trying to protect the only thing he cares about, the global financial system, which drunkard Juncker along with the other EU authoritarian unelected oligarchs fail to understand and just leave it to Draghi to figure out. Carney's speech is intended to give Draghi a helping hand by drawing attention to the issue, not help the UK. Central bankers have no allegiance to country. 

Ghordius's picture

excellent!

on one side, Carney defending the global financial system and...
... on the other side Juncker of Great Drinking Fame... endangering it?

lol

olibur's picture

"...He’s saying I don’t believe you can keep up the charade. .."
Nice try ... it's a charade allright but the way I see it, US is a mother of all charades at least since 1913.

NuYawkFrankie's picture

Wow!

When Ray speaks....... the world snores....

venturen's picture

Why Ray is correct. The entire world now is based on financialization...all work is for a few's profit . London is EU's financialization. They can print $100 Trillion...it will just go to London bankers and Silicon Valley. In the USA...they printed and it went to NY, Silicon Valley and Washington, Dc...a bit to Florida as bankers like having $100 Million Dollar Mansion.

 

But London leaving the EU...breaks the cycle....7.6 Billion are working for bankers and their billionaire funders. Going to get ugly when the 7.5 Billion figure this out

 

or the EU can just print a Trillion a month....and we all can keep pretending

Iconoclast's picture

Bizarre, Dalio is doing this for political reasons not profit. And in a world awash with QE it’s an insane bet. What a tit, and unnecessary risk, has money become that cheapened, at the stratospheric altitude he orbits in, that these are now the games which interest cockwombles like him?

FPearl602's picture

Marc Faber was referring to HISTORY...look at the Wki account of Rhodesia.

 

LegacyEdit

 

In the ten years after independence, around 60% of the white population of Zimbabwe emigrated, most to South Africa and to other mainly white, English speaking countries where they formed expatriate communities. Politically within Zimbabwe, the consolidation of power by Robert Mugabe continued through the 1980s. Following amendments to the country's constitution in 1987, parliamentary seats reserved for whites were abolished, and an executive presidency was created, held by Mugabe. Many expatriates and some of the whites who stayed in Zimbabwe became deeply nostalgic for Rhodesia. These individuals ar?e known as "Rhodies." Native whites who are more accepting of the new order are known as "Zimbos."

While as Rhodesia, the country was once considered the breadbasket of Africa. Today, Zimbabwe is a net importer of foodstuffs, with the European Union and United States providing emergency food relief as humanitarian aid on a regular basis.[177] The nation has suffered profound economic and social decline in the past twenty years. Recently the agriculture sector has started to do well since the availability of expertise and machines has improved supported mainly by China.[178][179]

Zimbabwe also suffered from a crippling inflation rate, as the Reserve Bank of Zimbabwe had a policy of printing money to satisfy government debts, which introduces excessive currency into the economic system which led to the demise of the local currency. This policy caused the inflation rate to soar from 32% in 1998 (considered extremely high by most economic standards) to an astonishing 11,200,000% by 2007. Monetary aid by the International Monetary Fund has been suspended due to the Zimbabwe government's defaulting on past loans, inability to stabilise its own economy, and its inability to stem corruption and advance human rights.[177] In 2009, Zimbabwe abandoned its currency, relying instead on foreign currencies such as the South African rand, the US dollar, the Botswana pula, the euro and the British pound, among others.[180]

In 2008 elections, Mugabe garnered 41%, Simba Makoni 10% and Morgan Tsvangirai 48% of the votes cast for president forcing a runoff election called by the Zimbabwe Electoral Commission (ZEC). In the months leading to the run-off, instances of extreme violence between the two major parties (ZANU PF and MDC) led Tsvangirai to withdraw from the election. In February 2009, a power-sharing accord was reached which resulted in the Zimbabwe Government of National Unity of 2009. The accord was, essentially, to create the position of "Prime Minister" for Tsvangirai, who served in that role from 2009 to 2013. Mugabe retained the title of President.

olibur's picture

The West $€£¥ Ponzi Rat King Quest begins. It's gonna be fun to watch it unfolding ...

"The original German term, Rattenkönig, was calqued into English as rat king, and into French as roi des rats. The term was not originally used in reference to actual rats, but for persons who lived off others. "

mpcascio's picture

I too am also shorting the EU.I've been early which is the same as being wrong but I know I will be correct eventually.They will not survive as a union.

Cutter's picture

Realize this is only a little over 1 percent of Dalio's AUM, but this bet is costing him almost $50 million a year to carry.  Since Bridgewater has traditionally been known for conservative bets and risk management, seems like a risky, could we say desperate, move.  After all Bridgewater has returned poor returns against the SPY for many years now.

A swing for the fences?  Because, as Grant recently pointed out, its the bottom of the ninth, and your the last out?

Herdee's picture

More musical chairs coming in order to provide extra printing liquidity. It all adds up in helping the Fed and U.S. deficits as well. Hyperinflation baby, here we come.

GreatUncle's picture

Is he TBTF, if so then it is not a gamble is it?

fiddy pence haff pound's picture

I think generally that London props up the ECB and Eurozone

with financial tricks. If I know my stuff, somewhere in that

derivatives mess lies the heart of Deutschebank. It's time to

rip it to shreds.

This is a serious battlefield. It might lead to unintended

consequences. Then, we can finally have that financial

collapse that we need to re-set, with local currency and

commerce. Do you honestly think we need capitalism

and central bankers to survive?

Otherwise, we are on the SDR yellow brick road, and it aint

gold.