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Last time we looked at Denmark it it was in the context of Luxor Capital which had some very ugly things to say about the Scandinavian country in "Rotten Contagion To Make Landfall In Denmark: CDS Set To Soar As Hedge Funds Target Country." Now, 6 months later, Moody's has finally gotten the memo: "Moody's Investors Service has today downgraded the ratings for nine Danish financial institutions and for one foreign subsidiary of a Danish group by one to three notches. The short-term ratings declined by one notch for six of these institutions. The rating outlooks for five banks affected by today's rating actions are stable, whereas the rating outlooks for two banks and for all three specialised lenders affected by today's rating actions are negative  The magnitude of some of today's downgrades reflects a range of concerns, including the risk that some institutions' concentrated loan books deteriorate amidst difficult domestic and European conditions, with adverse consequences on their ability to refinance maturing debt. The latter concern is exacerbated by structural changes in the terms of Danish covered bonds and the mix of underlying assets that lead to increased refinancing risk. While Moody's central scenario remains that financial institutions show some resilience to what will likely be a prolonged difficult environment - and the revised rating levels for most Danish financial institutions continue to reflect low risks to creditors - today's rating actions reflect the view that these risks have increased."

We're talking about a banking system that is nearly four times that of the US ($46 trillion vs. $12 trillion) with at least twice the amount of leverage (26 to 1 for the EU vs. 13 to 1 for the US), and a Central Bank that has stuffed its balance sheet with loads of garbage debts, giving it a leverage level of 36 to 1.

The avuncular Art Cashin opines on the roller-coaster of unreality that has been the equity markets for the last few days as outcomes become increasingly binary and investors increasingly herded from one direction to another. His sage advice - as if spoken by the most-interesting-person-in-the-world - "Stay nimble", my friends.

While most of the early action today was driven by a baseless rumor that the ECB would announce some magical recapitalization plan that would put everything back into its normal (by this we mean somehow sustainable) place, the alleged time when Draghi would make such an announcement came and went... and nothing. Instead, the ECB, using the FT as its mouthpiece, came out late in the day, however not with news that Europhiles wanted to hear. As a reminder, as part of the proposed Bankia nationalization scheme, Spain would inject Spanish debt into the insolvent entity, thereby allowing it to pledge the debt for ECB repo cash. Or so the thinking went. This was, in effect, Spain's bluff. The ECB has just called it.

It is becoming clearer and clearer that some new policy option is required in Europe - but as JPMorgan's Michael Cembalest excellent cartoon description of the never-ending circular arguments among European leaders would put it - you would have to be a wide-eyed optimist to believe it will be a decisive one. Comparing the progress of the European Monetary Union with structural changes in the US around the end of the 19th century, it is arguable that more time is needed before judgment is passed but they may not get the chance. The resolution of a staggering EUR10 trillion in peripheral sovereign, household, and corporate debt may not wait. Durable unions are signaled by signs of wage convergence and unilateral transfers of wealth to smooth regional income difference - while a lender of last resort appears to be most people's solution, it likely will not be enough given the competitive divergences.

One of the problems with the Hispanic Pandora's box unleashed by a now insolvent Bankia, which as we noted some time ago, is merely the Canary in the Coalmine, is that once the case study "example" of rewarding terminal failure is in the open, everyone else who happens to be insolvent also wants to give it a try. And in the case of Spain it quite literally may be "everyone else." But before we get there, we just get a rude awakening from The Telegraph's Ambrose Evans-Pritchard that just as the bailout party is getting started, Spain is officially out of bailout money: "where is the €23.5 billion for the Bankia rescue going to come from? The state's Fund for Orderly Bank Restructuring (FROB) is down to €5.3 billion."...  And in an indication of just how surreal the modern financial world has become, none other than Bloomberg has just come out with an article titled "Spain Delays and Prays That Zombies Repay Debt." We can only surmise there was some rhetorical humor in this headline, because as the past weekend demonstrated, the best zombies are capable of, especially those high on Zombie Dust, or its functional equivalent in the modern financial system: monetary methadone, as first penned here in March 2009, is to bite someone else's face off with tragic consequences for all involved.  What Bloomberg is certainly not joking about is that the financial zombies in Spain are now everywhere.

For an unexpected dose of holiday humor, and a surprisingly spot-on prediction of the future of Europe's monetary system, we go to none other than unelected head of Europe, Herman van Rompuy himself.

The US may be closed today but Europe sure is open. And while the general sentiment may be one of modest optimism in light of four highly meaningless Greek polls which fluctuate with a ferocious error rate on a daily basis, now showing New Democracy in the lead (and soon to show something totally different - after all Syriza had a 4 point leads as recently as Friday according to one of the polls), pushing equity futures higher, Spain has so far failed to benefit from either this transitory spike in optimism driven by record number of EUR shorts forced to cover (more below), with its yields touching a fresh record overnight, the 10 year hitting 6.50% and 450 bps in the spread to bunds, while re-re-nationalized Bankia, now with explicit ECB support plunging nearly 30% only to make up some of the losses and trade down 20% at last check. An earlier 2 year bond auction out of Italy did not help: the country raised the maximum €3.5 billion in zero coupon bonds, however the OID was high enough to send the yield soaring to 4.037% average compared to 3.355% just a month ago, while the Bid to Cover dropped from 1.80 to 1.66. In summary: Europe is walking on the edge right now, and the only thing preventing it from imploding this morning is some short covering as well as a furious statement out of Germany, which has to understand that its precious ECB is now directly funding nationalized banks: something Merkel and BUBA's Weidmann have said in the past is dealbreaker.

There are still 3 weeks until the next so very critical Greek elections (which if we are correct, will have an outcome comparable to the first, and not result in the formation of a new government absent Diebold opening a Santorini office), meaning the power vacuum at the very top in Europe will persist, and while the market demands some clarity about something, anything, nothing is likely to be implemented by a Germany which is (rightfully, as unlike the US, Europe does not have the benefit of $16 trillion in inflation buffering shadow banking) concerned by runaway inflation if and when the global central banks announce the next latest and greatest global bailout, which this time will likely by in the $3-5 trillion ballpark. However, none of this will happen before the market plummets as Citi explained last weekend, and Europe has no choice but to act. Luckily, as the events calendar below from Deutsche Bank shows through the end of July there are more than enough events which can go horribly wrong, which ironically, is precisely what the market bulls need to happen for the central-planning regime to once be given the carte blanche to do what it usually does, and believe it can outsmart simple laws of Thermodynamics, regression to the mean, and all those other things central bankers believe they can simply overrule.

As Americans mindlessly celebrate another Memorial Day with cookouts, beer and burgers, the U.S. war machine keeps churning. As we brutally enforce our will on foreign countries, we create more people that hate us. They don’t hate us for our freedom. They hate us because we have invaded and occupied their countries. They hate us because we kill innocent people with predator drones. They hate us for our hypocrisy regarding democracy and freedom. Just when we had the opportunity to make a sensible decision by leaving Iraq and exiting the Middle East quagmire, Obama made the abysmal choice to casually sacrifice more troops in the Afghan shithole. We have thrown over $1.3 trillion down Middle East rat holes over the last 11 years with no discernible benefit to the citizens of the United States. George Bush and Barack Obama did this to prove  they were true statesmen. The Soviet Union killed over 1 million Afghans, while driving another 5 million out of the country and retreated as a bankrupted and defeated shell after ten years. Young Americans continue to die, for whom and for what? Our foreign policy during the last eleven years can be summed up in one military term, SNAFU – Situation Normal All Fucked Up. These endless foreign interventions under the guise of a War on Terror are a smoke screen for what is really going on in this country. When a government has unsolvable domestic problems, they try to distract the willfully ignorant masses by proactively creating foreign conflicts based upon false pretenses.  General Douglas MacArthur understood this danger to our liberty.

“I am concerned for the security of our great Nation; not so much because of any threat from without, but because of the insidious forces working from within.”

Mere hours after the annual European Eurovision song contest ended at a cost to the host country in the hundreds of millions, money which should have been spent productively elsewhere but wasn't while providing utterly unnecessary distraction to hundreds of millions from what is truly important, we get another stark reminder that the continent is not only broke, but that it no longer even pretends to have credible ideas about how to go about fixing itself. The latest speculation: "Secret plans are being drawn up in Brussels for a European rescue fund that could seize control of struggling banks across the Continent. The scheme, which would be funded by a levy on banks, will be presented by supporters as a "silver bullet" that could halt the steady escalation of the eurozone debt crisis. It is being worked on in tandem with a proposal from Mario Monti, the Italian prime minister, for a Europe-wide guarantee on bank deposits. The proposal would throw the financial muscle of Europe's stronger nations, and healthy financial institutions, behind weaker countries and lenders. Proponents, including top advisers to the European Commission, say the removal of the threat of bank collapses would restore market confidence in Italy and Spain." In other words, last week's rumor that was supposed to be presented at the latest flop of a FinMin summit is once again being reincarnated as apparently nothing else in the European arsenal has any remaining credibility - and as a reminder, none other than unelected Monti's one-time employer Goldman Sachs said a eurowide deposit guarantee would not work.

Europe continues to fight the wrong battle, and continues to spread contagion risk. It is clear that Greece has had a solvency issue now for over 2 years.  The ECB and Troika chose to treat it as a liquidity problem.  Maybe, they could have argued that in early 2010, but by the summer of 2011 it was obvious to any credit observer that the problem was solvency, yet they continued to treat it as one of liquidity.  That is scary because if they fail to see the problem correctly now, they will fail miserably.  Not only is the problem clearly solvency, but now forced currency conversion has been added to the mix. Any "solution" from the EU must now address that risk, and it is not the same as solvency.  Programs that can protect against solvency may do nothing for the redenomination risk. We keep playing with scenarios and find it hard to find out where a Greek exit doesn't result in a steep sharp decline in the market.  We could go through more ideas of ECB intervention, but in the end most will have flaws.  Dealing with currency conversion risk is huge.  Dealing with the contagion risk that has been created by the EFSF is huge. Will Europe force Greece out thinking they have a plan; that fails miserably and sparks the miserable series of consequences we’ve outlined?  Sadly, yes.

If you cannot read the writing on the wall then allow me to read it for you. The European Union has abrogated the Rule of Law for the good of the State. This is the second such abrogation with the first being the exemption of certain European institutions and the IMF from the Private Sector Involvement of Greece. Greece may be a one-off exemption as they claim but we now have a second instance where jurisprudence has been overturned for the good of the nations of Europe. This is not Socialism or Capitalism but rather some sort of Fascist governance which I publically decry as the echo of the jackboots sounds across the Continent once again. The precedents have now been set and the future is clearly marked by a return to the totalitarianism of a politically controlled State. My advice is therefore succinct:

RUN!

Recall when Zero Hedge said two weeks ago that in the age of ZIRP, corporate balance sheets simply do not matter. The reason for that conclusion were of course the endless public debates over whether Chesapeake's massively overlevered capital structure would lead to its demise. Our view was that while balance sheets certainly matter in a normal market, one not dominated by central planning and endless hunger for yield, in the new ZIRP normal, none of the old school metrics of solvency, viability or even profitability matter. One person who appears to have agreed with our assessment, and put his money where his mouth is, or $775MM more specifically, is none other than legendary corporate raider Carl Icahn, who minutes ago announced that funds controlled by Icahn have raised their stake in CHK to 7.56%, making him the second biggest holder of the stock, and in a letter just sent to the CHK Board, in rather angry tones, demanded 2 board seats for his own representatives and 2 for Chesapeake's largest shareholder Southeastern Asset Management. Below we chart just how it is that beginning on April 19 at a price of $18.03, Icahn's funds accumulated over a period of 18 days, a total of 49.4 million shares of stock at what appears to be a Volume Weighted Average Cost of $15.70/share, meaning that as of the stock spike on this announcement he is currently in the money.

Goodbye, living spirit.