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As Dexia Nationalization Rumors Spread, A Compression Trade May Be In Order

Tyler Durden's picture


As Peter Tchir, of TF Market Advisors,  observes in the note below, the inevitable as predicted by us a week ago, is about to become a reality. In light of the imminent nationalization of Belgium's biggest bank, it may be time to compress the CDS of Dexia, which also as suggested last week, should trade in line with Belgium, while Belgium itself blows up. The only risk to this trade is that ISDA actually does its job for once, and proclaims Dexia to have experienced a credit event - thus triggering the CDS. Alas, since this will set a very bad precedent for all the other banks due to be nationalized, we would tend to discount the possibility of this happening.

Via Peter Tchir:

It looks like the plan is back to "nationalizing" Dexia.

Not sure if it is Belgium or Belgium and France, but looks like that is the strategy.  Dexia with 566 billion euro of assets and 155 billion euro of public debt could make things interesting.  Belgium, which already has debt of 322 billion vs GDP of 340 billion may be at risk of downgrade.  They are currently Aa1/AA+ but already on outlook negative at S&P.  The Belgium 5 year bonds yielded as low as 2.94% during Monday's risk-off, flight to safety trade, but have spiked back to 3.4% as the market realized that Belgium bonds might not be the best flight to safety trade out there.  French 5 year paper is only back to 1.87% instead of 1.7% and that move is almost entirely attributable to the "risk-on" trade running through the market.

Belgium's guarantee commitment to EFSF is 27 billion.  I do not know what their portion of the IMF handouts are, but that would only add to the debt problems facing Belgium.   The debt burdens are piling up quickly with all this aid.  It will be interesting to see if this nationalization actually calms the markets or helps the market figure out how messy the situation is and that the better countries are at real risk of getting dragged down in their efforts to protect weak countries and banks that made big mistakes.


Chart: Bloomberg


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Fri, 10/07/2011 - 12:06 | 1749867 YesWeKahn
YesWeKahn's picture

What just happened? ES down 3 points in 1 second.

Fri, 10/07/2011 - 12:08 | 1749876 BrocilyBeef
BrocilyBeef's picture

Could we be off to the races?

Fri, 10/07/2011 - 12:11 | 1749889 YesWeKahn
YesWeKahn's picture
  • Sprint Nextel Shares Plunge Nearly 10 Percent as Company Says It Needs to Raise Money
  • Fri, 10/07/2011 - 12:18 | 1749911 BrocilyBeef
    BrocilyBeef's picture

    That brings them down 85% in 5 years. MAJOR BULL IN THE SHOP!

    Fri, 10/07/2011 - 12:23 | 1749930 fuu
    fuu's picture

    Clearwire now off 26% today. Oops after the refresh it is off 29%.

    Fri, 10/07/2011 - 12:30 | 1749965 MillionDollarBonus_
    MillionDollarBonus_'s picture

    "but already on outlook negative at S&P".

    S&P lost ALL credibility after they downgraded the United States of America. Their ratings can hardly be taken seriously given their complete inability to recognise the value of safe-haven US treaduries. Look at the yields on T-bonds - clearly the market sees the absurdity of S&P's ratings.

    Fri, 10/07/2011 - 12:37 | 1750002 Lord Welligton
    Lord Welligton's picture

    the value of safe-haven US treaduries.

    Now if you'd said US Tragedies ........


    Fri, 10/07/2011 - 13:48 | 1750306 falak pema
    falak pema's picture

    americans are not tragedians...they have the pioneer spirit and believe only Apaches and Cheyennes, their ethnic likes,  are in the tragedian club; and the Confederates. Not the sons of the blue coats. 

    Fri, 10/07/2011 - 12:07 | 1749875 BrocilyBeef
    BrocilyBeef's picture

    That was close... BONUS TIME AT DEXIA!

    Silly Belgium. You have no national identity, shit, NO GOVT.

    Fri, 10/07/2011 - 15:52 | 1750851 Mentaliusanything
    Mentaliusanything's picture

    Cleaners are in: 

    Going to be an interesting weekend


    Wonder what dexias Investment grade is now ?? better ring a ratings agency

    Fri, 10/07/2011 - 12:11 | 1749891 Motorhead
    Motorhead's picture

    Ah, but the city of Mons (Bergen) will be the European Culture Capital in 2015.  Whoever decided on that must be in the trash collection business.

    Fri, 10/07/2011 - 12:21 | 1749923 koperniuk666
    koperniuk666's picture

    Mons is a dump.

    Notable for having the site at which the first soldier died in WW1 and, just 500 meters away , the site where the last soldier died...

    10 million deaths  - 500 meters.  Another triumph for government.

    Coming again soon.



    Fri, 10/07/2011 - 12:13 | 1749900 lano1106
    lano1106's picture

    I was wondering. Isn't RBC from Canada having a big investment in Dexia?


    Fri, 10/07/2011 - 12:18 | 1749912 buzzsaw99
    buzzsaw99's picture

    Credit events do. not. happen. (unless they benefit jpm and the squid)

    Sat, 10/08/2011 - 22:38 | 1753900 RMolineaux
    RMolineaux's picture

    Speaking seriously, how many times has a "credit event" been invoked?

    I appears to me that the invention of credit default swaps has two real purposes, neither of which has anything to do with protecting securities holders:

    1.  Give the Wall Street crap shooters a new instrument to earn fees and speculate on with other people's money.

    2.  To move risk into some obscure cubby hole of a counterparty where it can be forgotten.  No doubt many believe it simply disappeared.

    What insurance company would issue a policy on automobiles if they knew that every car in the country would be in an accident in the next few weeks.

    Without reserves or supervision, the CDS market is a total fraud.


    Fri, 10/07/2011 - 12:38 | 1750008 RSloane
    RSloane's picture

    Trainwreck.....can't take my eyes off......

    Fri, 10/07/2011 - 13:01 | 1750100 Vampyroteuthis ...
    Vampyroteuthis infernalis's picture

    My question is if Dexia is larger than the GDP of Belgium, even if all of the taxpayers money of Belgium and France was thrown into the mess, would it matter? We should make a new phrase, TBTN: Too Big too Nationalize.

    Fri, 10/07/2011 - 12:58 | 1750092 machineh
    machineh's picture

    'The only risk to this trade is that ISDA actually does its job for once, and proclaims Dexia to have experienced a credit event - thus triggering the CDS.'

    You know, it's astounding that CDS trade in such immense volume, when their vital credit event trigger is so ill-defined and subject to interpretation by parties of interest.

    How can such a murky definition of payout possibly pass a due diligence review? The entire CDS market is a kind of confidence racket, isn't it?

    Fri, 10/07/2011 - 13:03 | 1750110 Mister Ponzi
    Mister Ponzi's picture

    When Fannie and Freddie were nationalized, a credit event was triggered. Thus, I would not bet the farm on this compression trade idea.

    Fri, 10/07/2011 - 13:08 | 1750119 DutchR
    DutchR's picture

    Where is SuddenDebt?


    Anyhow, rumors of nationalisation this weekend according to this Belgian newspaper:

    Fri, 10/07/2011 - 16:33 | 1751047 Motorhead
    Motorhead's picture

    Sudden Debt is probably out getting bombed on Trappist beer on this Friday evening.  During the work week, it's only Maes or Jupiler.  :-)

    Fri, 10/07/2011 - 14:40 | 1750521 americanspirit
    americanspirit's picture

    I have it on good authority that Warren Buffett is about to buy Dexia and turn it into a chain of waffle houses

    Fri, 10/07/2011 - 21:01 | 1751735 oogs66
    oogs66's picture

    they got put on watch today after the close, nice call ZH!

    Sat, 10/08/2011 - 21:43 | 1753818 ollimond
    ollimond's picture

    Beginner's question: what is the easiest way to buy CDS, are there even options on CDS available?

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    karmete's picture

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