European Black Swan Sighted

Tyler Durden's picture

While everyone's attention was focused intently on peripheral European bond spreads last week and the incessant call for ECB intervention, a dramatic (and contagiously panic-worthy) move occurred in the European Investment Bank (EIB) bonds.

For those unfamiliar, the EIB is the EU's IMF-equivalent and is the largest international non-sovereign lender and borrower. Technically, it is defined as "the European Union's long-term lending institution established in 1958 under the Treaty of Rome. It supports the EU’s priority objectives, especially European integration and the development of economically weak regions."

5Y Euro-denominated AAA-rated EIB bond spreads crashed wider, blowing past the 2009 record highs and clearly indicating that European capital flight is in full swing.

The IMF-like entity, supported by a small capital base of deposits backed by promises of huge capital injections by sovereign nations, has massive exposure across Europe (and elsewhere). EUR382.4bn of senior unsecured debt and (according to Bloomberg - chart below), EUR2.5bn of deposits (admittedly backed by supposed promises to make whole loan commitments) does not make for a sound AAA-rated firm in our humble opinion.

Clearly investors think the same this week and are starting to worry about the same self-referencing, self-supporting house-of-cards that caused the EFSF to be written off as unworkable.

It is clear that the contagion is spreading as Bund yields start to underperform (no capital flight to safety within the Euro-zone) and furthermore, as the chart above shows, the stress on the EFSF has now spread to the EIB's publicly tradable debt.

It is no wonder given the size of their loan portfolio and who it is being lent to:

Spain, Italy, France, Portugal, and Greece all in the Top 10 with simply enormous outstanding debts relative to the capital in-house to cover potential losses (let alone any MtM or economic risk budgeting).

The debts outstanding, much as with any major investment bank, are denominated in multiple currencies and the yield curves below show the differentiation of those curves by major currency.

The next few months/quarters/years has huge supply from the EIB as it rolls its major debt load and while it maintains its AAA-rating - and therefore appears very attractive from a carry-per-regulatory-risk-capital perspective, we suspect the professionals are already unwinding their exposure very rapidly.

The next few months have over EUR20bn in maturities (and EUR6bn in interest payments) and so we will get plenty of opportunities to judge how new issue premiums will adjust secondary markets.

The following chart (of the USD-denominated EIB debt yields) should be enough to prove that both systemically (yield curve shift higher) and idiosyncratically (potentially speculative-driven negative bets as bear flattening is occurring) the AAA-rated EIB is facing some significant stress and should it need to make capital calls (to maintain its AAA-rating), is Spain, Italy, France, and Greece going to step up to their promises...

There are no CDS trading on this reference entity (yet) but given the still-relatively-tight nature of the bond spreads, we suspect specialness is not an issue and borrow is possible. The 2s5s bear-flattener looks the lowest vol trade but at such low costs of carry, outright is perhaps just as attractive on a reduced size trade. The compression in the EFSF-EIB trade also looks attractive.

Charts: Bloomberg

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Chris Jusset's picture

"5Y Euro-denominated AAA-rated EIB bond spreads crashed wider, blowing past the 2009 record highs and clearly indicating that European capital flight is in full swing."

This is potentially WORSE than the Post-Lehman collapse ... which itself was worse than any post-Depression collapse.

Buckle-up.  Have popcorn handy.

ratso's picture

Not really. 

Is this just another version of THE SKY IS FALLING?  Yeah,  I'll have another beer.

masterinchancery's picture

If  you don't think this stuff is real, you should be out buying up euro bonds--right?

ratso's picture

There's a real difference between making a dumb investment and believing that the world is coming to an end.  These days there are way too many people looking for evidence that the world is ending and finding it even when it isn't there. 

When every one is running to one side of the boat they are most likely wrong so it is usually more prudent to be on the other side - That does not, however, translate into buying euro bonds.

LowProfile's picture


I mean, what could go wrong with 152.96:1 leverage?

Besides the fact it's going to infinity:1, I mean...

Carlyle Groupie's picture

Yea but do we always have to refer to it as a black swan? I mean that shit is racist man!

That guy Taleb is a bitter little racist with lots of fuck you money.

CClarity's picture for an interactive map that shows which countries owe what to other countries, how much that translates to on a per person basis, and what percentage of GDP it is.  What a mess.  

TruthInSunshine's picture

JP Morgan, the Squid, et al., and most importantly, their unseen bosses (no, not Jamie or Lloyd), have to eat - and eat very well, no matter what.

That means that no matter what the outcome of this 'crisis,' you can rest assured that many more of us in the US and EU (not to mention China & Japan), will be on a budget; as in an every night Ramen Noodle budget.

More of the earth's valuable are belong to them, bitchez.

Eisenhower warns


redpill's picture

The NFL is FIXED!  From now on I'm only rooting for teams if their name ends in S!

--Lloyd Blankfein

Michael's picture

Did you hear the Chinese housing bubble bust is accelerating. 17 of 70 major cities prices down in September and 34 of 70 major cities prices down in October or something close to that. Once a mega housing bubble starts to burst, there's no stopping it. Trust me.

Chris Jusset's picture

Well, it HAD TO HAPPEN, we just didn't realize that it would crash this soon.  Looks like the Chinese miracle is hollow after all.

Oh regional Indian's picture

The Great wall is crumbling (literally), the BRICS are crumbling (figuratively).

And it definitely is not THE balck swan if you saw it coming.

Watch Spain. I think PIIGS is SGIPI. Italy will fall last. No doubt. 

The Circle of circles is Italy, France, Germany, UK and the US. The rest are ALL expendable. Populations of said circle are expendable last.

Ponzi kabuki delusional drachmas.



Chris Jusset's picture

Spain is at the brink... 22% unemployment ... banks have to write-off 50% of real estate ... Spain's CDS are climbing ... interest rates are above 6% ... huge national debt ...

Oh regional Indian's picture

I think it was all kept on the hush hush for Spain so that the "right" leaders of their newly elected, right wing govt. could be firmly in place.

Give it a week or so at most. Question is, is Spain's underbelly soft like Ireland's or will they strike, literally and figuratively.  

I think El Torro is going to get the sword betwen the shoulder-blades, rather mercilessly.

What goes around, comes around and all that sort of thing.


TruthInSunshine's picture

When (not if) this reaches France, it will already be over, and the decision to either turn on the CERN ECB printing machine will have been made (bailouts for bagholders of PIIGS+France+UK sovereign and EU Zone banking debt - resulting in maximum pain for taxpayers in solvent EU Member states as well as ALL consumers in Europe using the to purchase the necessities of life, who will see at least a 40% and as much as a 70% devaluation in their purchasing power over 5 short years), or the decision to not turn on the CERN ECB printing machine will have been declined (EU breakup, with maybe a core block remaining, in either a somewhat orderly or totally chaotic fashion, but where the brunt of the pain is imposed on investors who took risks in buying EU Member Sovereign debt and the debt of EU Zone banks and financials, and all assets bearing such investment risks).

I didn't even mention CDS/CDO.

That's the absolute beauty of what is cold, sterile mathematics: It doesn't lie.

Just like one can't have their cake and be able to eat it, too, the EU Debtapocalypse won't allow for Europeans to be able to do what is absolutely necessary (print € to infinity and beyond, in an amount that will make The Bernank look tame by comparison) to hold the EU, in even what roughly resembles its current form, together, without Europeans getting absolutely crushed in terms of their purchasing power and far higher tax rates (than what are already extremely high tax rates in the few solvent EU Member States).

Chris Jusset's picture

It seems that EVERYONE except for the EU knows and realizes that it's OVER for the Eurozone.

Gavrikon's picture

Black swans are not rare at all in Eastern Europe.  I actually saw a mob of them on my last vacation there.  Of course, they were mugging an elderly white swan at the time . . .

Dr Paul Krugman's picture

The bond yields might be moving north, but this does present an opportunity for debt holders.  Like the article said, these bonds will be rolled over.  This will give the debt holders the opportunity to get better rates, while getting the face value of their bonds back.  This is a great buying opportunity for them.

knukles's picture

And so, Wise Herr Docktor Krugman, how many have you purchased for yourself?  Which issue at what price and when?  Those who follow your advice wish to know, please.

Thank you.

Dr Paul Krugman's picture

I think these bonds are at a great price, as long as Europe acts coercively.  How is Italy, the third biggest bond issuer, going to go belly up?  It is not going to happen.  Especially while T-Bills are so low. 

The most important factor though, and I think it will happen, is that Europe commits to acting on their debt obligations.  They have tried to do this with the EFSF, but that has been put on hold.  Italian banks are doing the right thing and buying Italian debt.  You don't think Spanish banks will buy Spanish debt?  French banks?  And all the while they collect high yield, buy low, and in 30 years when everyone forgets this recession they will be cashing them in at face value.

Yes, I will be a buyer of European debt.

BoNeSxxx's picture

Just so I have this right,... the banks are going to purchase sovereign debt that the issuing nations can't afford to service and the euro nations are going to issue more debt to bail out the banks after they take the necessary haircuts on the bonds.  Rinse and repeat.  Problem solved. Sounds reasonable to me.

I guess I should write a check to my wife for $1,000,000 and have her write me a check for $1,000,000.  Hey, why not?  All the cool kids are doing it.  Heck, I'll even form a corporation and issue bonds on the side to build up my office and hire a few staff to execute the check kiting while I sit on the beach -- apparently you will buy them.

Dr Paul Krugman's picture

So what you fail to understand is that inbetween the movements of the cyclical nature of the economy, people will spend.  What matters is how much they spend.  So if we increase the amount we can spend, then people spend more.

For example, if you write you wife a check or a million dollars, she will buy groceries, go out to dinner, have a spa, buy some jewelry, a new car, maybe a house.  So when she pays you back, even with interest, spending has increased.

Dr. No's picture

You won a Nobel Prize for that?  That is the most flawed argument I have read on ZH and showes your stupidity.  Every man knows a wife will NEVER pay back owed funds.

BoNeSxxx's picture

Million$Bonus?  Is that you?

GenX Investor's picture

What matters is that all debts must be repaid, just look at the Franco Prussian War that set up the 20th century of destruction.  You can't confiscate and expect everyone to be cool with that.  Taxes ("legalized" confiscation) for things that serve no purpose or go to redistribute to less productive members of society can only go on so long before change occurs.  Now that is "Change we can belive in."

The Big Ching-aso's picture



"All debts must be repaid........."


Correction:    "All debts must be repaid unless the payer says 'Go fuck yourself and the horse you rode in on' and also happens to be holding a nuke against your head."

Then all of a sudden the debt will be 'forgiven' whether you think this is fair or not.    This unique event is known as 'An offer you can't refuse'.


TruthInSunshine's picture

"All debts must be repaid........."

Let the record reflect that we're here to discuss the outstanding loan XYZ made by ABC to DCE that is the subject of this hearing/meeting/conference.

Have the creditors been able to come to mutual agreement as to the concessions that they will make in order to execute legal satisfaction of this debt?



a)  All debts must be repaid, but in this case, there will be an exception (see many examples in history where it sucked to be the creditor where these exceptions were made, for whatever reason, whether the debtor was a sovereign, corporation or individual).

b)  All debts must be repaid, but you're not going to like the purchasing power of the fiat you're going to receive in satisfaction of that repayments. Thanks for that loan way back when, and here's our final payoff of our balance, so go out and try not to spend it all in one place. Thanks.

c)  All debts must be repaid. Just give us some time, and let us decide how our children and grandchildren and great-grandchildren will repay this, because we care about them and all that, but we really need to get what we were promised by the politicians that we voted for, damnit. So give us some space. We're (or they're) good for it.

d)  All debt must be repaid. The check is in the mail, bitchez.

e) All debt must be repaid, except in circumstances were a con, a ruse, a deception, a mistatement of material fact, a fraud in the inducement in the giving of the loan or the explanation of the terms of repayment(s) was made by the creditor, and we're declaring the loan repayment obligation null and void (in fact, void ab initio), bitchez.

f) All debt must be repaid, but we're about to launch a war on your sorry asses, so excuse us while we shell your cities, bitchez.

Oh regional Indian's picture

I wish I could reprint the absolute CRAP this man or his real life altered EGO write in Indian Newspapers.

He (PK) is the great champion (maybe should be called Double Jowled CHOMPion) of GloBULLization.

A joke Mr. PK, you and your ilk. I hope this is you and you read it and knwo that even in India, those that know, mock you and your Infosys buddies.


masterinchancery's picture

Doubt it, any more than Leo bought Greek debt after we satirized his silly defense of it.

aldante's picture

I can appreciate that you are willing to get your paper money back. However, my observation is that it will not be in $ but in some other currency that simply will have no relation to our current valuations.

thunderchief's picture

In your world, Dr. Krugman, Debt never dies, as we keep expanding the debt cycle and we never stop growing.  The world is an elastic balloon.  European debt is always a bargain as it is always serviced, never defaulted on, and always rolled out to some far point on the horizon.  Why don't you just say money printing as save everyone some reading?

I think that leads to hyperinflation.

Chuck Walla's picture

I think Dr. Paul forgot the /sarc flag on his post.

francis_the_wonder_hamster's picture

If that's really you Paul.......f*ck off.


Zero Govt's picture

i think i've spotted another Black Swan... it's €3 Trillion of debt that has slipped ever so quietly under the radar and there's 26 of them (Black Swan countries) 

well it's a 'surprise' to the EC/EU/ECB

the other 'surprise' is the botched together in a hurry European Financial Suicide Fund didn't go down too well with creditors 

...the EC/EU/ECB really are getting smacked in the face with all these surprising Black Swan events, it's almost like they haven't a freekin clue what they're doing (which would explain the surprise)

mkkby's picture

Sheesh.  How many of these semi/non governmental organizations does the EU have?  Does everybody over there work for one? 

No wonder their economies are in the crapper.  The Germans make a few cars and tools.  Everybody else is either on a committe that has endless shrimp fests, or lends money to each other based on their own taxes.

Ethics Gradient's picture

Indeed. Let the monster die. Then we can all get on with our lives rather than standing around waiting to see where the pieces are going to fall.

TruthInSunshine's picture

I hereby declare 'Black Swans' to be known as 'Fractional Reserve Bankster Intentionally Induced Parasitic Shock So As To Allow Their Masters To Scalp A Bountiful Harvest Events.'

It's raelly long, and not nearly as catchy, and it certainly doesn't flow off the tongue as Taleb's 'Black Swan' does, but it's so much more informative and reflecting of life meeting reality.

(I am still convinced that the 'Black Swan' Taleb references, instead of being a freak of genetic mutation, was simply doused with hot tar as a depraved and psychotic attempt at staving off boredom by a bored Rothschild descendant)


**Instead of a Hank 'Tanks in the Streets & Martial Law' Paulson scary speech in 2008 to wrest a blank and apparently endless check from taxpayers, it would appear something far larger is afoot, with the pain, criminality and draining of global taxpayer blood being far more dramatic this time around. They're going to bring Bela Lugosi back for the upcoming warnings and public speeches.

***Jamie Dimon told his daughter, as he reiterated it to CONgress, that when she asked him what a financial crisis was, he replied "something that happens every 7 or 8 years, princess." He may have to amend that to "every 3 or 4 years, princess."

americanspirit's picture

Actually TIS that particular swan was indeed a Rothschild, but was not covered in tar - it was turned into a black thing by an angry wizard.

Pain Train's picture

I'll say it again...the term "black swan" is being misapplied on Zerohedge. It is NOT simply any big, bad event with huge ramifications. Rather, it's an event that was COMPLETELY UNFORSEEN AND UNEXPECTED. An example of a black swan event would be, say, a Russian military move to seize the Straights of Hormuz this week.

And before some smarty says, "well, you just conceived it, so by your definition, it's not a black swan," keep in mind that being able to imagine something does not equate to giving it a statistically significant chance of actually happening. 

LetThemEatRand's picture

I believe that ZH is actually making the point that professional pundits and mainstream advisors all will claim that no one could have seen it coming, thus the use of the term.