Columbus Day / Erste Bank

I found this little tidbit interesting. Since 1980, Columbus Day, known for low volume as the Bond market is closed, has closed up 21 days and down 7 days a 3:1 average. Columbus Day 2008 the market closed up 11.58%.

As for Erste, unless you are European, you probably have not heard of the huge Austrian bank, however having travelled to Europe many times and being married to a Hungarian, in my very own wallet as I noticed Saturday when looking for my PetsMart Card, I have an Erste bank card.

As of the time of the European banking stress tests, ERSTE claimed no exposure to CDS, which was an accounting gimmick as they were not held in a trading account, which is what the stress tests looked for, but rather held as "Credit Surrogates".

Today the huge Austrian bank came clean and admitted to losses in their Hungarian and Romanian portfolios that would lead to a 14% loss of book value, something exacerbated by the housing situation in both countries which gets pretty complicated but has to do with Swiss Franc mortgage transactions, something Hungary is currently being scrutinized for.

ERSTE announced today that their CDS portfolio of $5.2 billion EUR ($2.4 bb related to financials and $2.8bb related to sovereign exposure) is taking a major hit-something previously unknown or declared in the banking stress tests.

This alone may be an ugly event for the bank, the wider implications are "Why was it not disclosed during the stress tests?" and even more frightening, "How many other banks did the very same?" and "How Much?" in essence, this is something that has been suspected for sometime, however this is the first confirmation from an actual bank. Now these banks will likely be forced to mark their CDS portfolios to market, taking a major hit in the process as CDS spreads have spread like wild fire. In essence, a CDS is insurance, the bank writing it (ERSTE) is betting their will be no default, the bank or sovereigns buying CDS are buying insurance, so you can see as PIIGS and now other countries like Romania and Hungary start down the path to default, the losses will build for these banks that wrote CDS and when they are forced to mark their CDS to market, the losses will be overnight and quite large.

To what degree this changes the banking sector risk throughout Europe is a total unknown, ERSTE is the first to declare it, however certainly not the last.

While I have described Slovakia as a wild card today, it seems there is a new and perhaps more ominous wild card taking shape in Europe and one in which the EU is probably not aware of. In other words, a whole new bogey man just reared its head in the EU.