Positions in Europe: Long Germany (EWG); Short Spain (EWP)
Below we include our weekly Risk Monitor for European bank CDS. Greek bank swaps were a noticeable standout week-over-week, tightening in anticipation of a favorable result to this weekend’s EU Summit. In fact, Eurozone leaders agreed to lower Greece’s bailout interest rates of about 5% by 100bps, and extend the repayment period of the loans to 7 1/2 years from 3 years. Greek PM George Papandreou estimates the moves would save about €6 billion over the life of the loans. [See our note published today titled “The EU’s Extend and Pretend Summit Lean” for our full take on results of the EU Summit on Competitiveness over the weekend.]
Overall, bank swaps in Europe were mostly wider, widening for 32 of the 39 reference entities and tightening for 7 (see chart below).
This morning our CEO Keith McCullough summed up the policy and market implications of the EU Summit as:
“Some of the dysfunctional European equity markets are celebrating fiat socialism this morning w/ a perfect can kicking of Greek and Spanish liabilities into the long term back of the net. Greece’s stock market is up a full +3% this morning, moving into a clean cut lead as the world’s best performing stock market for the YTD at +15%. The Federal Reserve has taught the ECB well – Central Planners of the world unite in victory.
Over the intermediate to long-term, piling more debt-upon-debt on these types of terms only increases the inevitability of another crash.”
We remain long Germany via the eft EWG in the Hedgeye Virtual Portfolio and shorted Spain via EWP last week (3/11) on a bounce. We think Spain’s banking issues are far from over despite government estimates late last week that the incremental capital needed to recapitalize its lenders is €15.1Billion, less than initial government estimates of €20 Billion in early January 2011. Our models show the EUR-USD trading in a range of $1.37-$1.40 over the immediate term (3 weeks or less).