Positions in Europe: Long German Bunds (BUNL)
Keith bought German Bunds (BUNL) in the Hedgeye Virtual Portfolio today. The move is a continuation of how we are thinking about Europe: there’s a relative advantage to playing the capital markets of the stronger countries on the long side and weaker countries on the short side, at a price. We’re highly sensitive to price and well aware that there’s no simple equation to pair or hedge risk in Europe: political headline risk, even from the tiniest of countries in Europe, can roll country equity indices and influence yields across the continent.
And we don’t expect political risk to abate the slightest from here. We’re also of the opinion that very little substance will come out of tomorrow’s European Summit. The market hopes to see Eurobonds rolled out to subsidize the region. While we don’t rule them out as a potential “tool” down the road, we think the strong anti-Eurobond stance of the Germans will hold weight. Further, should Eurobonds be highly considered, they’d have to be approved by 27 Parliaments across Europe. This is a tall order, especially considering the UK’s firm opposition to Eurobonds, and logistically there is no chance of this happening over a matter of days.
From a political positioning perspective, we see Eurocrats putting the ball in Greece’s court to decide its fate. Should the anti-austerity party of Syriza win elections (with a coalition) on June 17th, we expect the outcome to be a swift bank-run, bankruptcy, default, and exit from the Union. Again we don’t see this as a high probable event as polls continue to show that nearly 80% of Greeks want to stay in the Eurozone and with the EUR. The gun is loaded, do Greeks want to pull the trigger?
The only other options at hand under a Syriza victory are that the Greeks called the Eurocrats bluff, in which austerity is thrown off the table (we also view this as highly unlikely) or that another massive bailout scheme is issued (possibilities included another Eurobonds, giant EIB loan to Greece) around the election, but this too seems less probable than an outcome in which a pro-austerity coalition (probably New Democracy and Pasok) wins the elections and then maybe concessions are made to Greece’s fiscal consolidation targets.