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

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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