European Banking Monitor: The Intermediate and Long Term Outlooks Remain Favorable

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .




European Financial CDS - The most recent week saw swaps widen nominally in Europe's banking system, but the bigger takeaway remains the still-substantial tightening on a m/m basis. 


European Banking Monitor: The Intermediate and Long Term Outlooks Remain Favorable - a. banks


Sovereign CDS – Sovereign swaps mostly tightened last week with the exception of Japan where they rose 2 bps. Portuguese sovereign swaps tightened by -7.6% (-22 bps to 269 ) and U.S. sovereign swaps were unchanged. Overall, the trend of ongoing improvement in European sovereign risk profiles continues.


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Euribor-OIS Spread – The Euribor-OIS spread was essentially unchanged at 12 bps last week. Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 


European Banking Monitor: The Intermediate and Long Term Outlooks Remain Favorable - a. euribor


Matthew Hedrick


What's New Today in Retail (1/21)

Takeaway: UA lands biggest endorsement deal in years. Anticipatory Shipping? Seriously AMZN? Big IP win for COH. VFC talks labor costs (rising).



COH - Earnings Call: Wednesday 1/22, 8:30 am




UA, ADDY - Under Armour and Notre Dame Fighting Irish Join Forces



  • "The University of Notre Dame and Under Armour today announced their new partnership at a press conference on the school’s Indiana campus...As part of the 10-year agreement, Under Armour will exclusively design and supply the footwear, apparel and equipment for training and game-day uniforms for each of the university’s men’s and women’s varsity athletics teams."
  • "In addition to outfitting Fighting Irish athletic teams, the brand plans to integrate the university into its wide-ranging story-telling efforts, including global marketing campaigns, social media initiatives, in-store promotions and grassroots activations."
  • "This new affiliation further expands Under Armour’s leadership in providing proven performance benefits to college athletes on all playing fields. Notre Dame is the brand’s thirteenth Division 1 all-school partnership."


What's New Today in Retail (1/21) - chart2 1 21


Takeaway: This is perhaps the biggest win for UA since it landed Lindsey Vonn. Notre Dame has been perennial Adidas school -- it's top US franchise outside of the NY Yankees. But one of two things happened here, UA seriously paid up to steal the deal away from AdiBok, or b) Adi is in serious cost-cutting mode and is walking away from high ticket deals that might not be brand-accretive. We think it was a little of both. What's interesting at face value is the Nike did not come out on top. But Notre Dame is the biggest Anti-Nike school out there.


WMT - Wal-Mart sets up new company in India



  • "...Wal-Mart has registered a new company in India as it prepares to enter the country’s lucrative multi-brand retail market with a new partner."
  • "The retailer has registered a new company called Wal-Mart India Pvt. Ltd. in the country, according to the data available with the ministry of corporate affairs. According to the information, the new entity was registered on 15 January 2014."


Takeaway: Walmart is going to give India another go. It was clear that international was the #1 priority after the promotion of Doug McMillon to CEO in late November. India remains an untapped market, but Walmart is now competing with the likes of Carrefour, Tesco, etc. who have stated their intentions to enter the Indian market since the termination of Walmart's Bharti partnership in early October.


AMZN - Amazon Wants to Ship Your Package Before You Buy It



  • "The Seattle retailer in December gained a patent for what it calls 'anticipatory shipping,' a method to start delivering packages even before customers click 'buy.'"
  • "The technique could cut delivery time and discourage consumers from visiting physical stores. In the patent document, Amazon says delays between ordering and receiving purchases 'may dissuade customers from buying items from online merchants.'"
  • "So Amazon says it may box and ship products it expects customers in a specific area will want – based on previous orders and other factors — but haven’t yet ordered. According to the patent, the packages could wait at the shippers’ hubs or on trucks until an order arrives."


What's New Today in Retail (1/21) - chart1 1 21


Takeaway: This sounds like a redux of those CD clubs of the 80s and 90s that send you music before you ask for it. First drones - now 'anticipatory shipping'. Amazon is doing everything in its power to further its competitive advantage -- regardless of how outrageous these initiatives might seem. This sounds and looks like a logistical and inventory management nightmare to us, but if anyone can execute it effectively it would be Amazon. You've got to wonder how the shippers will be able to handle this type of uncertainty. After all, UPS already missed its latest quarter because Amazon jammed it with packages.


MW, JOSB - Men's Wearhouse Responds to Jos. A. Bank Announcement



  • " The Men's Wearhouse today issued the following statement in response to the announcement by Jos. A. Bank Clothiers, Inc. that its Board of Directors has rejected Men's Wearhouse's all-cash $57.50 per share offer."
  • "Given that the Jos. A. Bank Board has publicly acknowledged the compelling strategic logic of this transaction, we think Jos. A. Bank shareholders should question why their Board is refusing to negotiate with us to reach an agreement that will deliver to them significant value.  Accordingly, we call on the independent directors of Jos. A. Bank to promptly form a Special Committee that will objectively evaluate our offer and sit down with us to begin discussions."
    "At Jos. A. Bank's 2014 Annual Meeting, both of Jos. A. Bank's non-independent directors, Robert N. Wildrick, Chairman of the Board, and R. Neal Black, President and Chief Executive Officer, are standing for re-election. Jos. A. Bank shareholders can send a powerful message to their Board of Directors by voting to replace Messrs. Wildrick and Black with the independent candidates that Men's Wearhouse is nominating for election at the upcoming Annual Meeting."


Takeaway: MW has an extremely valid point. JOSB publicly touted the validity of the combined entity. But now it has a problem when it's the one being acquired? Sounds like either a) JOSB was not genuine in its initial comments, or b) the Board and Management of JOSB are trying to protect their jobs.


VFC - 5 Questions for The North Face's Brian Moore



  • "Years ago, when labor costs were really low, you could put a lot of parts and pieces [on a shoe] and stitch them all down, because stitching was essentially free. Now you have to limit yourself to only one or two layers and weld it more than sew it, trying to find ways to make it that don’t require a lot of [expensive] handwork."
  • "Does this mean the industry-wide search for less-expensive labor is a thing of the past? BM: I really do believe — and I could be wrong — that those days [with a] market that will give us an unlimited sourcing base are essentially over. I don’t think there is another China after China. We no longer have anywhere else to go to make product cheaper."


Takeaway: Two points of particular interest. 1) Labor costs are rising, and 2) the only way to curb rising input costs is through design process innovations. This is a trend we've been watching for the past few months. Particular call out for NKE whose FlyKnit may be the least labor intensive product on the market right now.


COH - Coach Gets $5.5M in Fakes Case Settlement



  • "...Coach Inc. scored a $5.5 million win last month by settling with the owner of a well-known Fort Lauderdale, Fla., flea market that was selling fake Coach goods."
  • "Coach’s Axilrod hopes its Swap Shop news will help to set a precedent. Since launching Operation Turnlatch, a national anticounterfeiting program, Coach has filed more than 700 lawsuits, and Axilrod added, 'I’m happy to say we haven’t lost a single one…'"


Takeaway: Stopping counterfeiters has been a point of emphasis for a number of brands recently, but COH takes it to a whole new level with 700+ lawsuits. The interesting thing with this case is that COH may actually get paid since the suit involves a legitimate business entity operating in the US. Many brands could learn a thing or two about defending its IP by watching COH. We still wouldn't touch the stock.


SP, DEB - Sportswear tycoon Mike Ashley smashes tank into Debenhams with plan to sell his sportswear



  • "Sportswear tycoon Mike Ashley will meet Debenhams boss Michael Sharp as early as this week over a plan to flood the department store with the billionaire’s clothing."
  • "The talks come after Ashley’s Sports Direct piled into Debenhams shares last week with trades that one source described as ‘parking a tank’ on Debenhams’ lawn."
  • "Ashley, main shareholder of Sports Direct, and his chief executive Dave Forsey plan to use the stake and Ashley’s ownership of the Slazenger and Donnay brands to push for a major role to supply an enlarged Debenhams sportswear department."


Takeaway: Ashley is one dangerous dude. You don't want him buying up your stock and then requesting a meeting to 'ask' you to carry his product.  Trust us…he'll win, you'll lose.


LVMH - Appointments at the helm of LVMH Watches & Jewelry Division



  • "Having successfully led the integration of Bulgari within LVMH, Francesco Trapani has decided to relinquish his operational duties as head of Watches and Jewelry division from 1st March 2014. He becomes an adviser to the Chairman, on matters relating to the Group’s jewelry operations, and remains a Director on the Board of LVMH."
  • "The Group’s jewelry Maisons (Bulgari, Chaumet, Fred and De Beers) will now report to Toni Belloni, LVMH Group Managing Director. Jean-Claude Biver, currently President of Hublot, will also take responsibility for the other watch brands TAG Heuer and Zenith."







Takeaway: We see real interest rate expectations dragging down the CLP another 10-15% vs. the USD from here amid unnecessarily easy monetary policy.



  1. Specifically, our GIP Model puts the Chilean economy squarely into Quad #2 (i.e. Growth Accelerating as Inflation Accelerates) for at least the next 3-6 months. By the end of 2Q14, we see Chilean CPI threatening the upside of the central bank’s 3% (+/- 100bps) target aided by a supportive base effect (i.e. easy comps) and annualized currency weakness.
  2. Ironically, this comes at a time when Central Bank President Rodrigo Vergara is stepping up dovish commentary amid the existing monetary easing cycle (-50bps of cuts since OCT).
  3. With the advent of this commentary, Chilean swap rates are hitting multi-year lows; the current 4.08% rate on the 1Y tenor is the lowest price since DEC ’10. Relative to the benchmark monetary policy rate, it has declined -10bps WoW to -42bps – effectively implying ~two additional rate cuts over the NTM. Assuming that comes to fruition, such policy would make absolutely no sense in the context of our intermediate-term GIP outlook for Chile.
  4. Moreover, with the Fed at least appearing set to continue tapering the pace of its asset purchases over the intermediate term, we think the spread between CLP and USD monetary policy will continue to diverge in favor of the USD – threatening to push the USD/CLP spot rate to/through the ~625 level over the intermediate term.
  5. Lastly, 1Y currency forwards are pricing at the ~565 level, implying our view is not within the realm of consensus expectations.


One of the things our Macro Team likes to do is make strategic calls on currencies – especially when our expectations for the country’s intermediate-to-long-term GIP (i.e. growth/inflation/policy) fundamentals diverge from consensus expectations or those of that country’s policymakers.


We don’t care if it’s a liquid currency like the AUD or the JPY (down -20% and -26%, respectively, since we outlined our bearish biases on 7/27/11 and 9/27/12, respectively) or an illiquid currency like the ARS or the VEF (down -42% and -32%, respectively, since we outlined our bearish biases on 11/4/10 and 10/9/12, respectively).


The CLP probably falls into the latter category, so we’re guessing this is roughly the point in the note where most of you lose interest. We’ve been actively covering the country for over four years now (along with the rest of Latin America) and this is the first note we’ve ever published exclusively regarding Chile.


For those of you who are inclined to continue on, we think the CLP has 10-15% downside from here as unnecessarily easy monetary policy weighs on real interest rate expectations.


Specifically, our GIP Model puts the Chilean economy squarely into Quad #2 (i.e. Growth Accelerating as Inflation Accelerates) for at least the next 3-6 months. By the end of 2Q14, we see Chilean CPI threatening the upside of the central bank’s 3% (+/- 100bps) target aided by a supportive base effect (i.e. easy comps) and annualized currency weakness.










Ironically, this comes at a time when Central Bank President Rodrigo Vergara is stepping up dovish commentary amid the existing monetary easing cycle (-50bps of cuts since OCT):


“There is a probability that we have an expansive monetary policy going forward. We don’t think it will be massive, that a huge monetary stimulus is needed, but there is a probability that an additional monetary push will be required. Faster inflation in the past two months is transitory, with little sign of wage pressures or international energy and food costs pushing price-increases toward the top of the target range in the foreseeable future.”


It’s not exactly as if the Chilean central bank was leaning hawkish when it kept rates on hold last week, so we think Vergara’s commentary represents a step forward in dovish guidance:


“The Chilean economy has continued to lose strength. The board estimates that in the coming months it might be necessary to increase the monetary stimulus to ensure that projected inflation will stand at 3 percent in the policy horizon.”


With the advent of this commentary, Chilean swap rates are hitting multi-year lows; the current 4.08% rate on the 1Y tenor is the lowest price since DEC ’10. Relative to the benchmark monetary policy rate, it has declined -10bps WoW to -42bps – effectively implying ~two additional rate cuts over the NTM. Assuming that comes to fruition, such policy would make absolutely no sense in the context of our intermediate-term GIP outlook for Chile.




Keep in mind that our call for Chilean inflation to accelerate over the intermediate term is in line with our #InflationAccelerating Q1 Macro Theme:


“Across the globe, reported inflation readings are poised to accelerate from post-crisis lows as easy comps, a commodity base effect and accelerating wage pressures all come to a head in the first quarter of 2014. Moreover, the reemergence of inflation as a core macro risk threatens to materially alter the investment landscape going forward.”


Moreover, with the Fed at least appearing set to continue tapering the pace of its asset purchases over the intermediate term, we think the spread between CLP and USD monetary policy will continue to diverge in favor of the USD – threatening to push the USD/CLP spot rate to/through the ~625 level over the intermediate term.


Structurally speaking, the Chilean peso is a dog. Chile scores very poorly on Pillar I of our proprietary EM Crisis Risk Model (i.e. BoP/Currency Crisis Risk), which is designed to rank emerging market economies according to their level of risk by capturing deviations from the sample mean across key metrics. Some noteworthy lowlights for Chile:


  • A bloated current account deficit of -3.4% (3Q13); and
  • A structurally-impaired outlook for the current account with the busted bubble that is commodities accounting for 85.8% of exports (2012 annual data).






Lastly, 1Y currency forwards are pricing at the ~565 level, implying our view is not within the realm of consensus expectations. Recall that there are three main “states” for consensus to adopt with respect to contrarian investing:


  1. Bullish enough
  2. Bearish enough
  3. Not enough of either




Right now, we think consensus is a clear #3 with respect to the Chilean peso. Happy shorting,




Darius Dale

Associate: Macro Team

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Just Charts: Early Merger Winds

In this note, we look at the largest companies by market cap in the Consumer Staples space from both a quantitative perspective and fundamental aspect where we offer one.  As you will see over time, sometimes our fundamental view does not align with the quantitative setup (though not often).


Consumer stocks are off to a tough start in 2014.  From a quant setup Keith McCullough said over the weekend that “I’d short 80% of this market cap.”  As you can see from the charts below, there is a bearish set up for the largest names in Consumer Staples. 


We generally believe that the group is way over-owned and loaded with premium valuations in a US consumption growth slowing world.  To that end, the most recent data on Disposable income per capita is making new lows and the high frequency Bloomberg weekly consumer comfort index has not seen any real improvement over the past 6 months.


Uniliver started the current earnings season saying that “first-quarter underlying sales will rise at the low-end of 3 percent to 5 percent guidance.”  The biggest issues for Uniliver is stemming from the slowdown in emerging markets, although according to the company Europe is showing few signs of improvement as consumers remain wary.


The sector received the spotlight this morning with news that Mondelez (MDLZ) appointed Nelson Peltz of Trian Partners to its board.  Trian is the fourth largest shareholder of MDLZ (2.33%) and was very public in July 2013 issuing a white paper encouraging the company to merge with PepsiCo and spin off its beverage business. This announcement, which heightens animal spirits based on Peltz’s track record of restructuring companies to unlock shareholder value, follows the BEAM acquisition by Suntory last week and offer exciting merger winds from a group that otherwise has had a slow start to the new year. 


We will be hearing from PG and KMB on Wednesday and next week begins the earnings deluge.  


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BUD – looks almost identical to DEO – big beta trade that’s starting to come undone for the group overall (XLP is bearish TRADE now, and that’s new); $101.24 is TREND support; above that bullish; below it bearish

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DEO – after failing to breakout to higher-highs (vs the DEC 2013 closing highs), now the TREND line of $126 is under attack here and that is new (and bearish if it breaks)

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KMB – next to MDLZ its one of the few stocks on this list I’d buy if blindfolded w/ no research; part of that is that the stock was so bad that its in a classic @Hedgeye bearish to bullish reversal (might not last, but looks good as long as $103.02 TREND support holds)

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MDLZ – best looking name on your roster; still in a Bullish Formation (bullish TRADE, TREND, and TAIL) with immediate-term TRADE support of 34.65 being the important line to use as a momentum stop

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MO – doesn’t look nearly as bad as PM, so an interesting pair there, but that can change if MO’s TREND support breaks (36.69, so its close by); just broke its immediate-term TRADE line of 37.41 in 2014 too

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GIS – if you told me to, I’d short this stock on the open tomorrow; brand new bearish TREND developing with $49.55 being TREND resistance

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KO – just broke its TREND line too (that’s new), with TREND support of 39.96 now being resistance, if you have bearish catalysts, good chance this stock retests the OCT 2013 lows

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PEP – doesn’t look as bad as KO, but pretty close – looks a lot like sector beta for XLP that just flagged bearish in the last few weeks; TREND line of $82.74 broke

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PG – looks like GIS; if you tell me to short this, I will. What was TREND support at 81.29 is now a freshly established wall of resistance; no support for this stock to $74-75

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PM – continues to look horrible on both an absolute and relative basis. TAIL risk resistance remains in place overhead at 86.63; no support to the SEP 2013 closing lows.

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Ukraine’s Political Corruption #StatusQuo

There’s more headline risk in the Ukraine today after reports of a long weekend of Molotov cocktail throwing from opponents of President Viktor Yanukovych’s government and beat-downs from the riot police to quell the protests.  But has anything changed in the streets since the original protests in late November 2013 around the government’s decision to turn to the Kremlin for “support” and reject a trade agreement with the EU? 




In fact, Yanukovych has increased his grip on the people by issuing ten repressive laws limiting freedoms of speech and assembly last Wednesday. They include: 

  • Jail terms for anyone blockading public buildings
  • Ban on the wearing of masks or helmets at demonstrations
  • Ban on any unauthorized tents in public areas, and
  • A crime to make slanderous remarks about a government official

In a statement yesterday evening, Yanukovych said that "now, when peaceful actions are turning into mass unrest, accompanied by riots and arson attacks, the use of violence, I am convinced that such phenomena are a threat not only to Kiev but to the whole of Ukraine."


Below is an article we wrote on 12/18/2013 titled “Putin’s Silver Spoon” that contextualizes the protests and provides our outlook on the Ukrainian political situation. Since our position hasn’t changed since we penned the article, we’ve reproduced it below for those that did not get a chance to read it. 


As an update to one measure of risk, directly below we updated our chart on the 5YR CDS spread.


Ukraine’s Political Corruption #StatusQuo - zz. ukraine


Ukraine’s Political Corruption #StatusQuo - z. jofa gear



12/18/13 01:55 PM EST

Putin’s Silver Spoon


Yesterday Russian President Vladimir Putin announced an agreement to loan the Ukraine $15 Billion and reduce the cost of natural gas exports by one-third. Will this quell the weeks of protests against Ukrainian President Viktor Yanukovych’s government?


While publically there was no talk of the Ukraine joining Putin’s custom union (for trade) – which already includes Kazakhstan and Belarus and is a contentious issue for the “Western” protesters – make no mistake that with this agreement Russia has reconfirmed its dominance over the Ukraine, and with it won a key geopolitical victory. For the Ukraine, it spells years, if not decades, before real reform (political and economic) may be realized.


Our Position: despite heavy foot power (protests) against President Yanukovych over the last four weeks, we do not expect dissent to topple government leadership that is orientated to the East (Russia). This view is built on several factors, including the unwillingness of the EU to fully commit to bringing the Ukraine into the EU, or conversely meet the sway of Putin to fold the Ukraine under its geographic empire. What Russia can provide in funds (both directly and through gas subsidies) we don’t foresee the EU attempting to match, and this balance of payments should reinforce existing strong levels of political corruption (beyond just the President), supported by a sizable proportion of the populous that identifies with the East. Further, unlike during the Orange Revolution, there is no clear organized opposition (merely disparate dissenters), all of which suggests to us that while protests may continue, there’s low probability that Yanukovych’s rule is toppled (especially following the deal with Russia) and a high probability that the Ukraine maintains its alliance with the Kremlin for the foreseeable future.


Below we note historical background, critical developments, and analysis aided by sources in the region to contextualize the protests:

  • Protests Beyond Just A Trade Agreement. While Yanukovych’s decision last month (21 NOV) to reject a trade deal with the EU (that had been in the works for a number of years) sparked the largest protest since the Orange Revolution in 2004, the dissent is rooted in opposition to years of crony capitalism, centered around a small group of oligarchs and government heads profiting from the state at the hands of the population.
  • The Orange Revolution Failed. The 2004 Orange Revolution ushered in great hope for the ideals of the West: democracy and reform in the spirit of the EU institution, but the Revolution failed.  Yulia Tymoshenko, with her camera-friendly crown of blond locks, and Viktor Yushchenko, with his discolored and uneven face after being poisoned by the opposition in 2004, were strong faces and voices of the Orange Revolution. The protests led to the defeat of Yanukovych in a forced second run-off election that ushered in Yushchenko as President and Tymoshenko as his Prime Minister in early 2005. While their leadership brought great “hope” that the country could have its Berlin Wall or Solidarity moment, their stars faded quickly (along with hope of real reform) under the weight of a corrupt state.  
  • Tables Turned. By 2010, Yanukovych won back the Presidency. By this time, Tymoshenko was surrounded by controversy and suspicion over gas contracts that she arranged with Russia in 2009: allegedly she agreed to inflated gas prices (which hurt the nation and led to shutdowns) in return for political favors and personal profit. Even Yushchenko testified against her in 2011 and Yanukovych sentenced her to a 7 year term in 2011 – a position the EU decries as “unjust” without substantiating with refuting evidence. Yanukovych’s rule since his reelection has been marked by the further consolidation of power and wealth, going so far as to take out certain leading businessmen (and oligarchs), redistributing assets and leadership positions to an inner circle of family members and a close cadre of “extended” family.
  • Economic Plight. The economy has unraveled under Yanukovych. GDP has gone from its last high of +5% at the end of 2011 to -1.3% as of Q3 2013. Pressing is an underfunded government (deficit around -8.5% of GDP) with plunging foreign reserves.  The country is estimated to have $17 Billion of debt payments due in the next two years, hence the importance of a bridge loan from Russia/EU. The government’s mismanagement of the economy has also included a lack of infrastructure spending and investment, equating to the erosion of living standards, while chasing away foreign investment on fears of sovereign default.   
  • No Opposition Leadership over Divided Kiev. Recent demonstrations illustrate that unlike the Orange Revolution, there’s no united leadership in the opposition parties. The contenders are made up of: Arseny Yatseniuk (leads the party formerly headed by Tymoshenko), Vitaly Klitschko (a boxing champion that heads the Udar “punch” party), and Oleh Tyagnibok (a right-wing nationalist).  All of them claim to have not seen the protests coming.
  • Ukraine and Kiev Remain Divided. A country with a population of 46 million, the western half of the country aligns itself politically with the West (Europe) and has the highest concentration of native Ukrainian speakers, whereas the eastern half aligns itself with the East (Russia) and primarily speaks Russian as a first language.  Kiev, the capital and largest city, is located centrally to the north, and is itself a very divided city both politically and linguistically. The recent demonstrations suggest that protesters have numbered anywhere between 100K to 600K, but the city remains divided. Reports suggest the protests have a grass roots organization “feel” that lack strong polarizing leadership and have been mostly met by non violence from the government/police, with no recorded deaths.  While the protests have been taking place, as recently as December 3rd, Yanukovych’s government survived a no-confidence vote.
  • Russian Interests. Russia is looking out for its national security interests first and foremost and using its stranglehold on natural gas as a bargaining chip. If Ukraine is under the influence of the EU, Russia is vulnerable to the south. Ukraine also represents an important natural gas transit country for flows to Europe, and a Ukraine under Russian influence helps to solidify Putin’s desires for a trading union. Given that Putin has done nothing to diversify his own economy in the last 12 years, he’s left with few options to exert his political clout beyond straight arming former Soviet satellite countries into his sphere of influence.
  • EU Interests. For the EU, the Ukraine is of less importance from a security perspective, unless it is looking to invade Russia (unlikely). Like Turkey, the Ukraine is geographically at the fringe of Europe. Given the experiences of the Eurozone ‘crisis’ and tail of slow growth alongside political indecision (there are now 28 separate parliaments and 18 Eurozone countries), we do not envisage the EU yearning to add a historically highly corrupt government to its roster.  
  • Russia Terms. To plug the country’s balance of payments deficit (for an estimated 18-24 months) Ukraine will issue $15 billion of Eurobonds which Russia will purchase from its National Wellbeing Fund containing $88.1 billion – the first tranche of $3 billion is expected as soon as year-end. In addition, the discount given to the Ukraine on natural gas, from current prices of around $400 per thousand cubic meters (tcm) to $268.50 tcm, is worth another $3 billion in subsidy. While Yanukovych did not sign off on entering Putin’s custom union (which Kazakhstan and Belarus have joined and which reeks of attempts to get the old Soviet gang back together), expect that this deal didn’t come without terms. Besides the national security piece that Russia receives, our guess is Putin will run the Ukraine’s PR campaign – he will decide if and when the Ukraine should enter his custom’s union.

Conclusion - Tipping East. The Ukraine remains a state uncomfortable with addressing its own sovereignty, preferring to be aligned. In our analysis, the Kremlin remains Yanukovych’s preferable partner over the EU given 1) Putin’s ability to quickly write a check (to cover the government’s liabilities), 2) his reelection aspirations for 2015 and ability to “win” cheaper, uninterrupted heat for the nation, 3) the cultural affinity to the East, including a significant percentage of the population that identifies with Russian rule and to some extent nostalgically yearns for a return to the Soviet days, 4) the likely harsher terms the EU and international organization could offer in exchange for loan packages, and 5) the lukewarm reception of the EU to fold the Ukraine into the EU.


If we look to the market for its risk assessment, as expected following yesterday’s deal Ukrainian CDS and sovereign credit yields dropped in a hurry. What’s interesting, however, comes from the second chart below that shows Ukraine’s 5YR Sovereign CDS pulled back on a historical basis (to its maximum based on Bloomberg data). Here it’s clear that while risk was being priced up into the event (1st chart), the absolute level is a moon shot from all-time highs in March 2009, a period when Western European nations had to negotiate with Russia over gas shut-down to their countries that was being pumped through the Ukraine. What this signals to us is that the EU community will only get its hands dirty in the interests of Ukraine when it stands to clearly and personally receive benefit. The “failures” of these protests for change and the muted response from the EU suggest to us that the Ukraine is far from what could be tipping point levels. Russia will remain its puppet master.


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Matthew Hedrick



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