World’s largest hedge fund puts down $13 billion to profit from trouble in Europe.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
A lot of people have lost a lot of money in the recent financial market convulsions, but there’s still plenty of money to be made by betting against the companies, as the world’s largest hedge fund, Bridgewater Associates, showed this week. It bet heavily against four of Spain’s biggest corporate hitters. The fund took up short positions worth €1.2 billion, or 0.5% of total shares at Banco Santander, BBVA, Telefónica and Iberdrola.
The gamble has already reaped dividends. Shares of Iberdrola, Spain’s biggest utilities company, Telefonica, Spain’s struggling telecoms giant, and Santander, Spain’s biggest bank ended the week around 5% lower, while BBVA tumbled 4%. Bridgewater placed its best against the two large Spanish banks last week, just as they presented annual results that largely disappointed the market. Since then, both banks have lost close to 10% of their market cap.
These short bets are part of the firm’s $13.1 billion in shorts against 44 European companies, according to EU regulatory filings, reported by Bloomberg. Among the notable short positions, in addition to the Spanish banks, are Total, Airbus, BNP Paribas, ING, Intesa Sanpaolo, Eni, Sanofi, and Axa.
At the beginning of the week, Ray Dalio, founder of Bridgewater Associates, made light of the recent rout in global stock markets saying in a blog post on LinkedIn that “this is classic late-cycle behavior,” adding: “These big declines are just minor corrections in the scope of things . . . There is a lot of cash on the side to buy on the break, and what comes next will be most important.”
Investors will nonetheless be wondering why the world’s biggest hedge fund is shorting Spain’s two biggest banks, whose shares had been on an 18-month roll. Until last week that is. As we warned in December, 2018 could prove to be a stressful year for Spanish banks, for three reasons:
Painful new rules. The introduction in January of a new accounting rule, known as IFRS 9, will force banks in Europe to provision for souring loans much sooner than at present. One direct result will be that banks will have to hold more capital on their books, and that will have a detrimental impact on their profits. BBVA calculated that as a result Spanish banks will have to increase their provisions by 21% — around €5.2 billion — to comply with the new requirements. This amount may be manageable for the industry as a whole, though some lenders, in particular the smaller banks, will suffer more stress than others.
Potential indigestion from Popular take-over. The decline and fall last year of Spain’s sixth biggest bank, Banco Popular, served as a reminder (a painful one for the bank’s 300,000 shareholders) that Spain’s banking system is far from fixed, despite the tens of billions of euros thrown at it. Now, the attention shifts to just how well Santander will be able to digest the collapsed bank it bought for €1
Exposure to high-risk markets. As the IMF warned in a report last year, BBVA’s largest international exposures by financial assets are concentrated in the UK, the US, Brazil, Mexico, Turkey and Chile. At least four of those six markets — Brazil, Mexico, Turkey and the UK — are likely to face headwinds in 2018. In the US, Santander’s subsidiary, Santander Consumer USA, is dangerously exposed to the subprime auto-loan sector, which is already taking a toll on global profits. So great is both banks’ exposure to Latin America’s two largest economies — Mexico (which accounted for 40% of BBVA’s global profits) and Brazil (which provides 26% of Santander’s) — that if things deteriorate in either or both of these key emerging markets, the spillover effects will be felt almost immediately in Spain’s banking system.
There could also be another reason for Bridgewater’s bet: the continued systemic weakness of the Eurozone’s periphery.
After all, Spain is not the only Eurozone economy that Dalio has massively shorted. In the last three months his fund has tripled its short bets against Italy, the Eurozone’s third largest economy and arguably weakest link, to €2.45 billion, up from €900 million in October. A total of 18 firms have been targeted including Italy’s main utility, Enel, the national oil and gas company Eni and the pan-European insurer Generali. Like Telefonica and Iberdrola, Enel and Eni are among the largest beneficiaries of the ECB’s massive corporate bond purchase program which could come to an end as early as September this year. The firm’s funding costs could rise sharply thereafter.
Most of Dalio’s short bets in Italy are targeting its still fragile financial sector. His biggest short is against Italy’s second largest bank by assets, Intesa Sanpaolo, which is widely viewed as Italy’s most stable bank. In fact, it was the only bank in the country that was big enough and in sound enough health to absorb the two ailing mid-size Veneto based banks Banca Popolare di Vicenza and Veneto Banca in June 2017.
The bank will win the battle, CEO Carlo Messina confidently predicted in a Bloomberg Television interview on Thursday. The bank has seen its shares slump 4% over the last three days but they are still 45% higher than they were this time last year.
“When [Dalio and I] had a conversation in October, he was short Intesa Sanpaolo and Italy,” Messina, who leads Italy’s biggest bank by market value, said in the interview. “I told him he could lose money on our position and in the end I think he lost money. Again, increasing the position, I think he’s losing money again.”
Whoever wins this financial duel, the stakes are high. Even for a firm the size of Bridgewater Associates, with an estimated €122 billion of assets under management, short positions of €13 billion concentrated in the Eurozone represent a lot of risk. For the Eurozone, the financial stability of its third and fourth largest economies, both of which are still very fragile, well, that’s priceless. By Don Quijones.
“Not another Carillion,” said the UK government to soothe frazzled nerves, as an entire industry is teetering. Read… Crash of Outsourcing Giant with 70,000 Employees Globally Sparks New Panic
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How do you feel this is going to impact the value of the Euro relative to the USD? Markets seemed to be confident in a stronger Euro through the first term of the current administration.. will that confidence falter?
Confidence misplaced falters. But as of now, Euro forward rates continue to indicate confidence in a narrative featuring a strengthening Euro vis a vis USD.
Nice … both the Bridgewater strategy and the report.
The change at the Fed … Powell … appears to be an inflection point or possibly a top. Since the globalist strategy requires all central banks to print and control together, the Fed being an outlier is a big monkey wrench in the works if rate normalization and balance sheet reductions continue.
The dirty economics in the Eurozone is beyond obvious, but momentum was in their direction. Not now.
Best wishes. I hope they turn $13b into $13t. The only way to end the theft from the middle class to the upper 1% and the Utopians is to eviscerate their supporters and, indirectly, the managers of the central banks. If this happens, pity the poor EU. Given this, expect some push back on their part. Might be a good show.
Hopefully, the Fed won’t cower in public if the Dow drops a few thousand points more. If they do, they will never have a bit of respect ever again. Ever. Just a tool of wall street and the Utopians and the globalists. Dow 50000 sooner than later.
Powell is not a globalist but Brainerd IS, she was Clinton’s fast track to the seat. If the markets fall badly that might set up a fight inside the FED, with Wall St crying for QE and QualE. The Feds balance sheet is the smallest of all the CBs, good justification. Powell is NOT an economist. The crisis of leadership goes all the way to the top, so a Fed fight would get pushed off the front page until real damage has been done.
Considering Spain & Italy banks are losing money and have needed to be rescued with cash in the last few years. And there is only so much debt they can take? They would have sink anyway, if at a later date without these new rules and public reaction.
Heck Wolf Street warned banks in Italy and Spain weren’t going good last year, a mix of corruption, debt and state debt, plus using Euro currency instead of pesetas and liras…
It means currency devaluation is out the table and so it means they are doomed.
The ECB will back stop everything.
Every big bad decision and every large EU zombie company.
Plan B for euro banks:
tighter credit underwriting & lean how to actually collect on outstanding loans.
Ray Dalio aint dumb, he has a strong team and knows what they doing.
I’m surprised Bill Ackerman isn’t all over this kind of stuff (EU banks = fish in a barrel). Instead, for 5 years running, he’s still chasing Herbalife (which may or not be a scam, but it’s cost Ackerman billions).
Alright since Spain and Italy banks are in trouble, and since Deutsche Bank is probably involved too with investments, and they have 47 Trillion dollars in derivatives it seems logical to me if former goes under so will the latter, right?
If that happens we will have a worldwide S-Storm that will collapse world markets like we have never seen since the great depression, or did I miss something?
Dalio will lose this bet in a big way b/c all of periphery Europe will drive their Teslas to Mars and establish a new world frontier there with Elon Musk as their supreme leader.
Well… the world financial system need a huge reset button, maybe a great depression that dwarf the 2008 one
Hi DQ, really interesting article especially reference the Spanish Banks. Do you agree with the hedge funds short? Aside of BBVA taking a big one off hit in Q4 their results look sound.
I suppose everything depends on whether the deterioration in Q4 was really just a one-off. Personally speaking I’m not convinced. In 2017 BBVA took a €1.2 billion hit alone on its 5% holdings of Telefonica stock, and that stock’s performance is unlikely to improve as the ECB withdraws the monetary support it’s been providing for the last two and a half years.
But the biggest source of concern for BBVA is its huge exposure to high risk emerging markets, in particular Mexico and Turkey. If the recent turmoil in global stock markets turns into a major correction, heavily indebted emerging markets, such as Mexico and Turkey, will probably be among the first to feel the financial blow back.
Thanks DQ, whilst a lot of the European banks are reducing their size-complexity and concentrating on their home country, the Spanish Banks haven’t. Is the Spanish banking business not that profitable?
MPS, the foremost of the Italian banking “living dead”, corrected their 2017 losses from €2.9 to €3.5 billion with an announcement late on Friday, possibly to avoid their already battered shares being hit a little more.
The cause? “Revised bad loan status”… this coming after six months of relentless propaganda about bad loans being a thing of the past.
And Italian banks, especially small local ones, have learned nothing from their past mistakes and have once again to lending to every harebrained scheme they can find, from Burger King franchises in rural areas to their old favorite source of putrefying loans, real estate speculation.
These banking executives think themselves smart, they think the sugar daddy in Franfurt and their own kin in the government and the media will bail them out again, and they may be right… but for how long?
MPS shares have been steadily dropping since October, losing over 20% of their value and the smaller banks, the kind whose shares are not traded on the MIB but on MTF’s (Multilateral Trading Facilities) are getting gutted a little every week, as shareholders cut their losses and quietly head for the door.
Betting against these living dead is not exactly a risky trade: it’s only a matter of how long before their enablers are either ousted or dump these moribund banks to save their own skin.
Should be interesting to see Monte’s and the other italian banks share price tomorrow.
Nice piece. Very true.
I think the trick here is that everyone is looking for an economic Black Swan but with Italy’s elections coming next month and many representatives are unknown quantities, the markets will get very interesting.
Bunga Bunga man was known to want out of the Euro and he was ousted by the EU elites and Renzi parachuted in. Looks like Bunga Bunga man is back and he will be looking for pay back.
You know what they say in the Bronx, pay backs a bitch!
Dalio is getting flak from ZH, but I’m betting long that Dalio is absolutely right on the money with the shorts. How could someone like Dalio short Italy & the EU banking Oiligopoly and be wrong in the long run of events?
ZH will be eating humble pie & crow after Dalio is vindicated for the largest short in the history of the world when he cashes in. And the Italians will probably get very angry with him, and his 20 partners on the shorts.
cha-ching for Dalio.
Not to argue, but Bridgewater is a hedge fund. A short is a hedge. That means he has longs.