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Smart Money Is Short France, Italy,The Euro,Long Germany

Investing|11/17/2011 @ 11:54AM |760 views
Smart Money Is Short France, Italy,The Euro,Long Germany

The other day I had lunch with the hedge fund that told me July, 2010 that European sovereign debt and European bank stocks were to be shorted. Because 2011 was to become the same or worse meltdown than 2008 in the U.S.

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Today,this hedge fund is short the stock market indexes of the European nations most suffering like France, Italy and Spain. And they believe that Europe in 2012 will be now worse than the U.S. in 2008. They agree with many observers that the political will is lacking in Europe to quickly turn the meltdown around.

Back in December, 2010, Prof. Charles Calomiris, also warned of an Armageddon for European banks due to their over-weighted loan commitments to the European sovereigns. The German banks, for example, had lent money equivalent to 6% of Germany’s GDP to Spain– and yet another 6% of GDP to Ireland.

This week I checked back in with the Henry Kaufman Professor of Financial Institutions, and found him immensely well-informed about the troubles of each European nation. Calomiris drew my attention to the huge spread between the yield o Italian 10 year debt- 7%, the same duration French note– 4,.50%– and the German 10 year- less than 2%. As France is in much of the same pickle as Italy, Calomiris reckons going short the French 10 year note is a good bet, as the yield should rise to nearer the yield on Italian debt. ( A higher yield means a lower price for the bond

Another trade Calomiris likes is long German banks/ short French sovereign debt or long Spain/short Italy, where the yield in Spain- 6%– almost makes up for the loss of the 7% coupon on Italy.

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