European Union

Whereas we have already noted that Dan Loeb's Third Point closed 2011 unchanged due to a disappointing December, today we note that according to his latest monthly performance update Loeb appears to have opened a major new position in the bonds of recently troubled Norwegian financial company Eksportfinans ASA. The chart below compares his October and December top holdings in which it is obvious that as of December 31, Third Point's third largest position is in the bonds of the private guarantor, which recently got in trouble following its downgrade to junk status in late November as Oslo withdrew its support. the result was a sharp drop lower in the bonds of the company, which traded down by 20 points on the news. So what is Loeb seeing here that makes him confident the bonds, all $33 billion of them, the bulk of which are Samurai, or yen-denominated, will surge sooner or later: another TBTF scenario, bond call play, or something else? One thing is certain: the 13F chasing lemmingrati will promptly jump in these bonds and take them much higher even if absolutely clueless why.

Was Iran born to bluff, or is it really much closer to building a nuclear weapon than anyone really knows? Now that the Islamic Republic has made its intentions clear, one has to assume that it has given away a certain measure of strategic surprise. If it really wants to get the most that it could – militarily – from an attack on tankers moving through Hormuz, it should have never even raised it as a possibility. By discussing it, we figure Iran has given the US “notice” that it might not have had in the event of an attack from the blue. Weren’t the maneuvers in the Straits (by Iran) enough to raise the question without raising alert conditions from the West and from Israel?

As if the situation in the Gulf was not enough on edge, here comes Europe with news, via Reuters, that EU governments have reached a deal to ban Iranian oil imports. The only thing pending is the determination of the starting date and other details. The result, as expected, is another leg up in crude. Sooner or later, this relentless rise higher will spill through to the pump, which according to the Michigan Bizarro confidence indicator will sent consumer optimism to historic levels. And now, the escalation hot grenade is back in Iran's court. Expect more missiles to be fired into the water and more rhetoric about Straits of Hormuz closure in 5...4...3...

The issue of Germany and its approach to ameliorating the overleveraged balance sheets of its southern neighbors will dictate the direction of sovereign spreads in 2012. The direction of sovereign spreads will also determine the direction of risk premium spreads in the leveraged finance markets— both bonds and loans. Defaults in the leveraged finance market will and should be an afterthought to the systemic risk factors inherent in sovereign and next-of-kin bank credit spreads. Therefore, forecasting default rates should take a backseat to a better understanding of German Kultur and thought that will shape the euro-zone sovereign finance structure in 2012 and beyond. The most recent European Union summit highlighted that we are left with some of the same issues that confronted the great empires prior to World War I—the battle between “English liberalism with its emphasis on individual freedom and self-determination and Prussian socialism with its emphasis on order and authority.”

As expected yesterday, when the US went out full bore with a Japan-lite approach of McCollum-like strategy of leaving Iran no option but to keep escalating until finally the US has enough public support grounds for a response, in under 24 hours Iran has launched a second missile, this time not a medium-range SAM to a long-range shore-to-sea missile. Needless to say, the US 5th Navy is watching these quite welcome developments with great interest. From Reuters: "Iran said on Monday it had successfully test fired a long-range missile during its naval exercise in the Gulf, flexing its military muscle to show it could hit Israel and U.S. bases in the region if attacked. The announcement came amid rising tension over Iran's disputed nuclear programme which Western powers believe is working on developing atomic bombs. Tehran denies the accusation and last week said it would stop the flow of oil through the Strait of Hormuz if the West carried out threats to impose sanctions on its oil exports." At this point it is glaringly obvious to all but the most confused that the US is consistently pushing Iran to escalate further and further, until such time as the US ships stationed in Bahrain say enough and decide it is time to sink some boats.

Because on the tenth birthday (and with trillions of dollars pledged to keep it alive, we use the term very loosely) of the most loathed currency in the history of the world, we find out that in the heads of the fat, bald, corpulent, and corrupt eurocrats, the zEUR0.pk is somehow represented by a hot woman. Our prediction: the 20th anniversary of the euro will star the Michael Jackson zombie from Thriller...dancing around on centrally planned puppet strings of course.

Not sure why the market is surprised by this, but it is.

• S&P PLACES LARGE BANK GROUPS ACROSS EUROZONE ON WATCH NEG - BNP, SocGen, Commerzbank, Intesa, Deutsche... pretty much everyone.
• EUROPEAN UNION'S AAA RATING MAY BE CUT BY S&P - you KNOW Barroso, Juncker and Gollum are going to take this very personally
• In short: Commerzbank AG, Natixis S.A., Credit Agricole S.A., Eurohypo, Deutsche Bank L-T counterparty credit rating, Deutsche Postbank AG, Intesa Sanpaolo,Societe Generale L-T counterparty credit, UniCredit SpA, Credit Du Nord L-T counterparty credit, Comapgnie Europeenne de Garanties et Cautions, Credit Foncier de France, Locindus S.A., Rabobank Nederland, CACEIS, Banca IMI SpA, Ulster Bank, Banque Kolb, Bank Polska Kasa Opieki S.A. ratings may be cut by S&P.

Basically, S&P just told Europe it has two days to get the continent in order or else. Said otherwise, it just called Europe's bluff. The problem is Europe is holding 2-7 offsuit...

Here is the draft document with our thoughts inserted directly into the document. As more actual details or termsheets become available we will attempt to analyze them as well.

If we knock down all the flimsy screens of artifice and obscuring complexity, what we see in Europe is a continent of debt-serfs, indentured to the banks under the whip of the European Union and its secular religion, the euro. What else can we call the stark domination of the big banks other than Neo-Feudalism? In one way or another, every one of the 27-member nations' citizens are indentured to the big international banks at risk in Europe, most of which are based in Europe.
We can clear up much of the purposeful obfuscation by asking: exactly what tragedy befalls Europe if all the sovereign debt in the EU was wiped off the books? The one and only "tragedy" would be the destruction of the "too big to fail" banks, not just in Europe but around the world. As the big European banks imploded, then their inability to service their counterparty obligations on various derivatives to other big banks would topple those lenders. While the political vassals call that possibility a catastrophe, it would actually spell freedom for Europe's 500 million debt serfs. From the lofty heights of the Manor House, then the loss of enormously concentrated power and wealth is indeed a catastrophe for the Lords and their political lackeys. But for the debt-serfs facing generations of servitude for nothing, then the destruction of the banks would be the glorious lifting of tyranny.

To understand the structural flaw which dooms the European Union, we need to start with the Union's fundamental financial characteristics. The European Union established a single currency and trading zone for the classical Capitalist benefits this offered: a reduction in the cost of conducting business between the member nations and a freer flow of capital and labor across borders. But there were flaws in the structure that are now painfully apparent. The Union consolidated power over the shared currency (euro) and trade but not over the member states’ current-account (trade) deficits and budget deficits. While lip-service was paid to fiscal rectitude via caps on deficit spending, in the real world there were no meaningful controls on the creation of private or state credit or on sovereign borrowing and spending. Thus the expansion of the united economy via the classical Capitalist advantages of freely flowing capital and labor were piggy-backed on the expansion of credit and financialization enabled by the Neoliberal Capitalist structure of the union. The alliance of the Central State and its intrinsic desire to centrally manage the economy to benefit its fiefdoms and Elites and classical free-market Capitalism has always been uneasy. On the surface, the E.U. squared the circle, enabling stability, plentiful credit creation and easier access to new markets for all. But beneath this beneficent surface lurked impossible-to-resist opportunities for exploitation and arbitrage.

Some historical parallels on where the current state of disintegration of the latest artificial European Union construct falls in historical terms from FX Concepts' John Taylor. "As supporters of the hypothesis that historical events display cyclicality that if studied and understood can improve decisions about the future, we are always trying to place current events in a historical context. Our goal is always to develop a strategy that can anticipate the twists that current historical actors will take. The recent crumbling of the Eurozone has been a perfect example...Finding a way to examine these events, we compared the situation leading up to the troublesome periods. We found a very interesting parallel between the 34 years following the Congress of Vienna in 1814-1815 which ended with the tumultuous 23 year span of revolutions and nation-building in Europe, and the time that followed WWII until the millennium, a 55 year span. This period ended with the founding of the euro."

But the real story is that this financial crisis in Europe could potentially cause the break up of the euro and of the European Union.

This is so deja vu of the EU press conference when the Greek bailout was announced on Sunday, May 9. Although this time there is no silver lining, as no deal has been reached. Anyway, here is the link for the EU press conference which so far is agenda-less so anything could be announced... or nothing.

Europe today officially fell off the stupid tree and hit every branch on the way down. The CDS ban is all but fixed: "Michel Barnier, the European commissioner in charge of an overhaul of financial services, may propose capping the size of individual trades, giving watchdogs the power to police big deals in derivatives such as Greek debt default insurance. Under a model which would resemble the approach in Washington, traders could be stopped from building up a large position that could let them swing prices in anything from oil to currency in their favour."

How many of those Greek, Portuguese, Irish and Spanish bondholders have factored the near guaranteed "additional" haircut (/scalping) they will receive having to stand behind the IMF in the event of a (probably guaranteed) default or restructuring? Do you think the investors of European banks (that includes central banks) that are holding/and currently still buying a boat load of these bonds have factored this into their valuations?