08/12/2011: ECB call - denying the obvious

Today's ECB call in charts:

First, timeline and international comps.

Next, comparatives to other advanced economies.

Do tell me if ECB is running the weakest, most liquidity-constrained system in the advanced world. Charts above don't show that...

So Doc Dragho has just hooked a fresh plasma pouch to the Zombiefied Euro Patient... and it's half-empty...

3/12/2011: Latest Euro Crisis Proposal: A Debt Fund to Solve Nothing

The latest technocratic deram of European sovereign finance engineers is out. Here's the extracts from Reuters report with my comments (full report link here):

"Wolfgang Schaeuble outlined his plans under which states would effectively siphon off a chunk of their debt to a special national fund and pay it off over about 20 years while committing to reforms to keep debt levels on target."

What's that, you say? To "boost confidence" of the proverbial markets, the Euro states "should put into a special fund that part of its debt which exceed 60 percent of its GDP, and should pay that off with tax revenues. Over a period of 20 years, the debt should be reduced to 60 percent".

So let me run through this in some order:

1. The debt will remain the debt - within the fund and outside.
2. The 'balanced budget' rules once adopted (and in Germanic fashion anything adopted = implemented) will assure no new debt accumulated.
3. Part of the debt above 60% of GDP will be extended in maturity (somehow, there will be 'no credit event' there?)
4. The part of the debt above 60% of GDP will be repayable out of tax revenues (the rest, presumably will be repayable out of  Schaeuble's pension fund?)
5. There will be no common liability - as "an earlier proposal this month from a panel of independent economic advisers to the German government which was rejected as unrealistic by Merkel, envisaged a European Redemption Pact. That proposal, for a fund of up to 2.3 trillion euros, was anathema to Merkel because it suggested pooling excess debt into a fund with common liability." Which means risks of each individual state debt will remain the same within and outside the fund. Just how this will impact sovereign yields begs some explaining.
6. Repayment of debt accumulated in the fund will have, presumably, some priority over other debts. Otherwise, what's the difference if this debt is in the fund or not. If so, what seniority implications will there be for two types of debts - within the fund and outside the fund? If none, there will be no material difference between the two and thus no change on current status quo. If Fund debt were to be more senior (having a first call on repayment by tax revenues) then the remaining debt quality will deteriorate. Implications - the Fund will make things worse, not better, for the sovereigns.

Overall, the whole idea of a Fund can only work if the following are simultaneously true:

1. There is a pooled liability for the Fund-held debts to assure improved ratings (already ruled out).
2. The combined (Fund-held and non-Fund) debts of all countries participating in the fund are jointly and separately sustainable (repayable) and the reason for the Fund creation is solely a short-term liquidity crunch. Note: only in this case future tax revenue will be sufficient to repay debts. But of course we already know that the Euro area problem is that the debts are NOT sustainable in Italy, Portugal, Greece and Ireland, and most likely also unsustainable in Belgium.
3. More indebted countries receive, during the period of repayment, sufficient fiscal transfers to prevent their economies from imploding and thus preventing their unsustainable debts triggering common liability clauses. This might be the case, but how will it go down with the electorates and Governments in surplus countries, over 30 years, one can only wonder.
4. The commitments to new budgetary rules of, say 2% maximum deficit, are fully implemented in real budgetary processes across all member states over the entire 30 years horizon. 

And that's a lot of "if"s, even more "no"s and not a single one "Yes!"...

24/11/2011: Insolvent Europe

The following link is to my article on EU-wide debt crisis for presseurope.eu (and no - not just that Government debt crisis  we've heard all about): here.

28/10/2011: Euro area leading indicator points to a recession in October

Euro area leading indicator for economic activity, Eurocoin, has crossed into contraction territory in October. Based on the latest data from CEPR, Eurocoin is now at -0.13%, with corresponding quarterly growth rate of between 0% and -0.05%, signaling the likelihood of a recession for the euro area as a whole.

We are now at the lowest reading since August 2009 when Eurocoin stood at -0.21% moving to the upside in September 2009. Eurcoin 3mo average is now at 0.04% and 6 mo average at 0.285%. Year on year Eurocoin has dropped 132%. Per CEPR: "The fall is the result of deterioration in most of the variables that are included in the indicator, and in particular of the worsening climate of confidence among firms and consumers."

Worsening Eurocoin now signals Taylor rule divergence for the future direction in the interest rates, as illustrated in charts below.

Inflation-consistent rates are in the 3%+ territory, while growth-consistent rates are in the range of at or below 2%.

24/10/2011: Euro CDS disaster Redux?

A picture (table) worth a 1,000 words...

via CMA.

24/10/2011: New Orders for Industry: August data

Cheerful update today from the Eurostat on New Orders in Industrial Production series:

"In August 2011 compared with July 2011, the  euro area (EA17) industrial new orders index rose by 1.9%. In July the index dropped by 1.6%. In the EU27 new orders increased by 0.4% in August 2011, after a fall of 0.6% in July. Excluding ships, railway & aerospace equipment, for which changes tend to be more volatile, industrial new orders rose by 0.7% in the euro area and by 0.5% in the EU27. In August 2011 compared with August 2010, industrial new orders increased by 6.2% in the  euro area and by 6.5% in the  EU27. Total industry excluding ships, railway & aerospace equipment rose by 5.0% and 5.2% respectively."

Here are the details:

Start at the top: EU17 new orders index is now at 115.11 for August, up on 112.93 in July, down on 115.54 in May. The index is now back into the comfortable expansion territory, where it has been since April 2010. 

2008 average reading was 110.09, 2009 average was 86.99 and 2010 annual average was 102.2. So far - through August - 2011 average is 112.93 - not a bad result. But miracle it is not - reading of 100 is consistent with activity back in H1 2005, so in effect, through August 2011 we have achieved growth of 2.05% annualized in terms of volumes of output. Given that since then we had pretty hefty doses of inputs inflation and moderate gate prices inflation, the margins on the current activity have to be much lower than for pre-crisis years. Which means relatively robust improvements in volumes of industrial new orders are not necessarily implying robust value added growth in the sector.

Meanwhile, German new orders have shrunk in August 2011 from 122.4 in July to 120.9 in August. Month on month German new orders are down 8.04% and year on year activity is down 13.34%. This marks the lowest reading since April 2011.

 Of the big players:

• France posted an increase in new orders index to 102.90 in August from 100.1 in July. France's 2011 average to-date is 100.43, well ahead of 2010 average of 90.93 and 2009 average of 84.31. France's new orders index averaged 100.06 in 2008.
• Spain posted a surprising improvement in August to 96.43 from 93.85 in July and yoy rise of 2.0%. Spain's 2008 average was 102.93, 2009 average of 81.57 and 2010 average of 89.61. For 8 moths through August 2011, Spain's new orders index averaged 94.27.
• Italy;s new orders index hit 117.21 - very robust increase of 6.14% mom from 110.56 in July. Italy's new orders index is now averaging 113.58 for eight months of 2011, up on 2010 annual average of 103.09, 2009 average of 89.75 and 2008 average of 104.59. It's worth noting that Italy exemplifies the fallacy of 'exports-led growth' argument - the country has posted very robust recovery in its significant and highly exports-oriented industrial sector, and yet it also posted virtually no growth over the last 2 years.

Other countries are illustrated below.

 So on the net, industrial production new orders signal some bounce back from the troughs of the slowdown in early summer 2011, but this can be immaterial for the wider Euro area economic growth and a temporary improvement. September and October data will be more crucial, signaling into early 2012.

24/10/2011: Some interesting links

Couple of interesting links on various topics of the crisis:

Fist, my most recent post for The Globe & Mail EconomicsLab: Europe’s (non) bailout plan predictable in its absurdity

Second, a very good graphic from NYTime on debt-default interlinks globally: Chart 1 and an interactive version here.

Third, some interesting points on global yield curves here.

And lastly, a good summary of contagion dynamics from the zerohedge blog which roughly outlines the scenario that I presented on Friday, October 14th, at the American Bar Association meeting in Dublin - that of the inevitable destruction of the euro as we know it (either in composition or in its totality) - here. 

16/10/2011: Hot air balloon of G20 summits

Having by now grown accustomed to the vacuous and pompous non-statements from European leaders of the crisis, one could not have expected much from the G20 summit other than predictable verbal ping pong of the non-EU nations urging Europe to deal with the crisis and the EU representatives returning boisterous claims that the “solution” being presented are “robust”, “timely”, “resolute”, “breakthrough”-like, “decisive”, and so on. This is exactly what is going on.

This weekend’s G20 summit failed to provide for anything different. Here are just few points from the final comments by the participants. The sources are here (http://www.reuters.com/article/2011/10/16/us-g-idUSTRE79C74G20111016) and here (http://www.reuters.com/article/2011/10/15/us-g20-highlights-idUSTRE79E1DA20111015).

Per French Finance Minister Fracois Baroin, the Euro crisis "…took up a little part of our dinner last night. We presented ... elements of the global and lasting package which heads of state and government will present at the Oct 23 summit. It responds to the Greek issue, the maximization of the EFSF, on the level of core tier 1 with a calendar which will be coordinated by the heads of government for the recapitalization of the banks. It responds, naturally, on the governance of the euro zone... We still have a week to finalize it."

Extraordinary vanity and vacuousness of the statement is self-evident. The idea that the Euro area crisis – pretty much the only reason for G20 gatherings nowdays “took up a little part” is absurdly juxtaposed by the claim that the EU presented “elements of the global… package” for resolution of the crisis. And do note the language: “global package” and “lasting”. To the French, it is rather common to refer to anything that impacts them as “global”, but the stretch of terminology here is obvious – the ‘package’ will have to be about the euro zone. In other words, it is not even pan-European, let alone global!

And then there’s that “lasting” bit. Per report: “The [G20] communique urged the euro zone "to maximize the impact of the EFSF (bailout fund) in order to address contagion". EU officials said the most likely option was to use the 440 billion euro [EFSF] fund to offer partial loss insurance to buyers of stressed member states' bonds in a bid to stabilize the market.” Now, give it a thought. A ‘lasting’ package of ‘solutions’ will use temporary guarantees to buyers of distressed debt?! This begs two questions: (1) How on earth will such use of EFSF address the main problem faced by over-indebted nations, namely the problem of unsustainable debts? Guarantees will not reduce Greek, Portuguese, Irish, Italian and Spanish debts to sustainable levels. (2) If EFSF were to remain a €440bn fund, how can the said amount be sufficient to provide already-committed sovereign financing backstop through 2015-2017, supply funds for banks recapitalizations to cover the shortfalls on sovereign funding, provide additional backstop funds for the sovereign deficits in the future, and underwrite a new tranche of CDS-styled insurance contracts that will have to cover ALL of the debt issuance by the distressed sovereigns? Note: it will require to provide cover for all debt, not just maturities-specific issues in order for it to be meaningful and prevent massive amplification of upward sloping yield curve, leading to potential front-loading of new debt by the distressed states and the resulting dramatic rise in maturity mismatch risks.

Baroin went on to dig himself even deeper into the verbal hole: "I have to tell you in truth that the results of the European Council on October 23 will be decisive… We've made good progress [on Greece] with the German finance minister. There are points of agreement which are emerging rather clearly and we will have an agreement on this point, but it would be premature to say what accord will emerge on Oct 23." In  other words: the summit achieved nothing and we might not even get a resolution ready for October 23^rd summit.

On France position on Greek creditor haircuts: "We will find an answer. [Read: we have no plan] You know the French position which is quite clear: we will refuse any solution that leads to a credit event." So overall, there is no plan and any plan will have to avoid significant write-downs on Greek debt. Or in other words: we have no idea how to solve it, but any solution will be irrelevant, because France wants it to be such.

"Central banks will continue to supply banks with necessary liquidity, we will ensure banks have the necessary capital. This is a very important message central banks are sending." That sounds like ‘do more of the same’ and pray for a different outcome.

"We prepared ambitious decisions for Cannes including a list of systemically important financial institutions." Jeez, what a breakthrough. How about just checking http://graphics.thomsonreuters.com/11/07/BV_STRSTST0711_VF.html list - it’s pretty comprehensive and you don’t need a summit to get it.

My favourite court jester was also out in force with statements. EU Economic Affairs Commissioner Olli Rehn didn’t wait for too long to stick his foot into his mouth:

"The communique of this meeting rightly underlines the urgency and need for decisive action to overcome the sovereign debt crisis and restore confidence in our economies."

Sorry, but does the EU Commissioner still need another communiqué to underline the importance of resolving the greatest crisis his employer faced since foundation of the EU?

"The communique welcomes, since the Washington meeting three weeks ago, that in the EU the reform of the economic governance has been concluded."

What reform, Olli? When and how has it been ‘concluded’? And if the ‘reform has been concluded’, why on earth would you say there’s any ‘urgency to overcome the crisis’?

"It is a very important reform ... It will help us to prevent future crisis"

So that’s it, folks. EU will never have another crisis again. As soon as they can deal with the current one, that is. Which, so far, has taken… oh… like 3 years of wholesale destruction of European economies and wealth.

"Beyond these positive steps, and in order to break the vicious circle, ... we put last week on the table a comprehensive plan, a road map. I am pleased to say that this plan received today a warm welcome from our G20 partners" If so, Olli, why on earth would the G20 continue to urge action?

On the net, the ‘summit’ was just another hot air balloon floating up above the havoc of reality, heading straight into the hurricane. Good luck to all on board.

12/10/2011: Starting on the right footing

Two longer-term points to start the day (and renewing the EFSF debate) right, folks.

Point 1 - Global macro and long term - excellent posts today from the Guardian (here) and from barry Eichengreen for Project Syndicate (here) both dealing with EFSF as a non-solution to the crisis, regardless of the size. Both post, just as all other analysis I've read so far can benefit from one additional reality check. What happens if/when the EFSF in its enlarged form gets implemented?

The focus of everyone's analysis so far has been the banks and the sovereign yields/ratings. Let's take a peek further ahead, to say 2014. With EFSF in place, some €500bn+ of liquidity has been pumped into the markets. The banks have taken some significant share of recapitalization funds and dumped these into Government bonds, EFSF bonds, and risky assets around the world. The Governments, having received a boost from the sovereign bond markets via their own banks are back on track to 'stimulating' the economy and the households are now fully pricing in not only their still intact gargantuan debt levels, but also future Government-assumed liabilities in EFSF. The ECB balancesheet is loaded with EFSF paper and short-term lending is rampant, implying that unwinding short term liquidity supply becomes impossible for the ECB without risking a massive liquidity crisis in the banking system. Next trace of post-EFSF world is... stagflation in the Euro land:

• Banks rising capital means margins on loans will rise, while private investment capital is now being courted by the banks at the same time as the corporates go for more debt and equity.
• Governments borrowing resumed means rates are pressured up to sustain euro valuations, which means policy rates are supported to the upside.
• ECB coffers full of EFSF paper means policy rates are supported to further upside.
• States-supported banking sector in Europe means lending supply down, compounded by higher capital calls.
• Taxes on ordinary income and wealth up, means no growth, compounding interest rates effects, despite Government 'stimulus'.

With European economy bifurcated into state-dependent sectors kept alive via debt issuance and private sector economy still on the death bed, as rates creep up to (retail levels) double digits for prime borrowers,wat takes place?

1. Heavily indebted households are being squeezed on both ends of their budget constraint;
2. Heavily debt-dependent European corporates are desperately trying to raise funding via equity issuance which runs against banks looking for more equity investors. Resulting capital crunch puts any hope for recovery on ice.
3. ECB, unable to unwind short-term funding to the banks and holding vast supply of EFSF-linked paper keeps the rates higher than Taylor rule would imply.

The problem, is that absent a direct and robust writedown of private debts and some sovereign debts, and restructuring of the banking sector, EFSF or any other similar measure, no matter how large it will be, will not be able to break the dilemma of "either banks go bust or economy goes bust".

Which brings us to Point 2: What needs to be done in restoring the banking sector to health?

Instead of focusing on immediate funding and capital issues, we need to focus on the actual causes of the disease:

Cause 1: too much debt in the system (real economy) highlighted here.

Cause 2: insolvent banking institutions nursing massive losses going forward.

To deal with both we need a systematic approach to restructuring the banking sector and household balancesheets. The latter is a tough call - expensive and hard to structure. But it will be impossible without the former and via netting of balancesheets it can be aided by the former. So here's the broadly outlined roadmap for restructuring Europe's banking sector:

Resolving Euro area banking crisis requires bold and immediate action. An independent panel, under the aegis of ECB and EBA should review the operational, capital and risk positions of top 250 banks across the Euro area and independently stress-test the banks based on mid-range assumed scenarios of sovereign bonds haircuts of 75% loss on Greek bonds, 40% loss on Portuguese bonds, 20% loss on Irish bonds, and 10% loss on Italian and Spanish bonds. In addition, risk weightings must reflect specific bank's dependency on ECB / Central Banks funding. 

The banks should be divided into 3 categories based on this stress test assessment: Solvent and Liquid banks (SL), with post-stress capital ratios of 8% and above and ECB/CB funding covering no more than 15-20% of the assets, Solvent but Illiquid banks (SI) with capital ratios of 6-8% and ECB/CB funding covering no more than 30% of the assets, and Insolvent and Illiquid banks (II) with capital ratios below 6% and ECB/CB funding covering more than 31% of the assets base.

SL banks should be required to raise additional funding in the private markets and de-leverage post capital raising to Loans to Deposits ratio (LDR) of no more than 110% over the next 5 years. 

SI banks are to be restructured, stripping back some of the non-performing assets, reducing LDRs to 100% over the next 2 years and recapitalizing them through public injection of funds from the EFSF-styled vehicle warehoused within the ECB with a mandate to unwind the vehicle through a 50% writedown of liabilities to EFSF (debt write-offs via cancelation of some of the real economic debts held by these banks - debts of households and non-financial corporations) and 50% recoverable from the banks over the period of 15 years. Public funding for recapitalization must follow full writedown of equity and non-senior debt and partial haircuts on senior debt.

II banks are to be wound down via liquidation - their performing assets and deposits sold and non-performing assets written down against capital and lenders' liabilities (bonds). 

If followed, this approach will deliver, within 12-18 months a fully cleansed banking sector for the Euro zone and improve debt overhang in the real economy, while encouraging new banks formation and competition.

03/10/2011: Euro area PMIs & Industrial Production - September

So for a poor start of the week, Monday data on manufacturing across the euro area continues to push the stagflationary growth scenario.

First, the eurocoin leading economic indicator came in at another contraction in September - see details here.

Second, gloomy PMIs readings across the entire euro area are, not surprisingly, confirming slowdown and contrasting the UK (although not too-cheerful 51.1 reading, on a foot of a 49.4 revision in August, with UK new export orders sub-index falling to 45.0 from 46.9, reaching the lowest level since May 2009):

• Euro area overall PMI at 48.5 in September against 49.0 in August, marking the worst monthly reading since August 2009. Output sub-index at 49.6 against 48.9 in August and new orders sub-index at 45.2 in September, down from 46.0 in August, lowest reading since June 2009. Rate of output contraction slows but new orders drop at fastest rate for over two years. PMIs fall in all countries except Italy. Steepest declines seen in Greece and Spain.
  
• German September PMI for manufacturing is at (barely expansionary) 50.3 from 50.9 in August and at the lowest level since September 2009.
• French September PMI-M fell to 48.2 from 49.1 in August. Now, recall that France posted zero growth in Q2 2011 when PMIs were above expansion line.
• Italian PMI-M up at 48.3 from 47.0 in August, implying that manufacturing is shrinking at a slower pace than before, but shrinking nonetheless.
  
• Spanish September PMI for manufacturing is at 43.7 down from 45.3 in August - both depressing readings signaling accelerating and deep contraction.
• Greece: 43.2 in September, down from 43.3 in August

So manufacturing activity overall is followed now by new exports fall off as well:


All of this has been building up for some months now. The latest Eurostat data (through July 2011) shows already nascent trends of weaknesses on manufacturing and broader industry sides:
Manufacturing:
New orders (lagging series in terms of signaling slowdown):
Capital goods (leading indicators):

And finally, overall industrial production:
Things are now looking structurally weak, rather than temporarily correcting.

03/10/2011: Eurocoin September 2011: continued weakness in euro area growth

Euro area leading indicator for growth, eurocoin, was released last week, showing dramatic decline in economic activity for September. Eurocoin has peaked in May 2011 at 0.62, having dropped persistently since then.

In September, eurocoin reading stood at 0.03, barely above the recession reading (below zero) and down from 0.22 in August.
This marks the second consecutive month that eurocoin is statistically indifferent from economic stagnation. The projected quarterly growth rate for Q3 2011 is now down to 0.08% from 0.1% estimate in August and from Q2 2011 actual reading of 0.2%. Annual rate projection based on 9 months through September averages is 1.82% and dropping rapidly from 2.5% in May to 0.12% in September.

In terms of ECB monetary policy stance,
Eurocoin-consistent policy rate is now around 2.0-2.25%, while inflation-consistent rate is now closer to 2.75%.
The divergence of the current rate from both targets and the gap between inflationary and growth targets suggests that the likely direction of the economy is toward moderate stagflation with inflation anchored around 1.8-2.5% and growth around zero.

And here are the core components of eurocoin showing significant downward trends:

24/09/2011: Anglo Bonds and National Accounts

Note: corrected figures below (hat tip to @ReynoldsJulia via twitter).

Per Nama Wine Lake blog - an unparalleled true public service site on Irish debacle called Nama and many matters economic and financial, Irish Government (err... aka ex-Anglo Irish Bank, aka Irish Bank Resolution Corporation*) is on track to repay USD $1bn (€725m) unsecured unguaranteed senior Anglo bond on 2nd November 2011.

The gutless, completely irrational absurdity of this action being apparent to pretty much anyone around the world obviously needs no backing by numbers, but in the spirit of our times, let's provide some illustrations.

According to the latest QNA, in current market prices terms, Irish GNP grew in H1 2011 by a whooping grand total 0f €307 mln from €64,337 mln in H1 2010 to €65,012 mln in H1 2011, when measured in real terms. This means that Anglo bondholders payout forthcoming in November will be equivalent of erasing 28 months and 10 days worth of our economic growth.

According to the CSO data on national earnings, released on September 8, 2011, Ireland's current average earnings across the economy stand at €687.24 per week, implying annualized average earnings of €35,736.48. Irish tax calculator from Delloite provides net after-tax (& USC) income on such earnings of €28,287.39 per annum. This means that Anglo bond payout in November is equivalent to employment cost of 25,630 individuals.

According to CSO's latest QNHS data, in April-June 2011 there were 304,500 unemployed individuals in Ireland. This means the jobs that Anglo bond payout could cover are equivalent to 8.42% of the current unemployment pool.


I am not suggesting for a minute that we should simply use the money to 'create' government jobs - anyone who reads this blog or my articles in the press etc would know I have no time for Government-sponsored jobs 'creation'. But, folks, the above numbers are startling. We are about to p***ss into the proverbial wind the amount of money that is enough to cover our entire economy's growth over 2 years, 4 months and 10 days! For what? To underwrite 'credibility' of the institution that is a so completely and comprehensively insolvent?

* Note 1 that Anglo still calls itself Anglo (until October 14th) and still insists it is a bank as the web page http://www.angloirishbank.ie/ states clearly [emphasis mine] that: "As a Nationalised Bank since January 2009, the key objective of Anglo Irish Bank’s Board and new senior management team is to run the Bank in the public interest... The Bank continues to provide business lending, treasury and private banking services to our range of customers across all our locations."

Note 2:
The above, of course, assumes that €725mln exposure is hedged against currency fluctuations. If not, as Nama Wine Lake points out, the exposure rises to ca €740mln. The above figures therefore change to:

• GNP growth equivalent of 2 years, 4 months and 28 days
• Number of average earnings jobs of 26,160, plus one part-time job
• 8.59% of currently unemployed
  

21/09/2011: ESRB warns of contagion across euro area financial systems

The General Board of the European Systemic Risk Board (ESRB) held its third regular meeting today on September 21st, and here are the highlights.

In terms of assessing the current situation, the ESRB stated that "since the previous ESRB General Board meeting on 22 June 2011, risks to the stability of the EU financial system have increased considerably. Key risks stem from potential further adverse feedback effects between sovereign risks, funding vulnerabilities within the EU banking sector, and a weakening of growth outlooks both at global and EU levels."

So what ESRB is saying here is that the crisis has completed full circle: if in 2008-2009 transmission of risks worked from insolvent banking sector to insolvent sovereigns and (technically always solvent) monetary authorities via liquidity supports & recapitalization schemes, since 2010 through today the risks have flown the other way - from insolvent sovereigns to insolvent banks via bust bond valuations. The only question that remains now, is where the vicious spiral swing next. In my view - at least in anti-taxpayer, anti-competition Europe it will force taxpayers to directly recapitalize the banks (see IMF's latest calls and the rumor that France is about to go this way) to protect incumbent banking license holders from bankruptcy, receiverships and competition from healthier and new banks.

"Over the last months, sovereign stress has moved from smaller economies to some of the larger EU countries. Signs of stress are evident in many European government bond markets, while the high volatility in equity markets indicates that tensions have spread across capital markets around the world. The situation has been aggravated by the progressive drying-up of bank term funding markets, and availability of US dollar funding to EU banks had also decreased significantly. In that context, central banks have decided on coordinated US dollar liquidity-providing operations with longer maturities."

Nothing new in the above, but it is nice to see an honest admission of the ongoing liquidity crisis. Now, recall that I have said on numerous occasions that bank runs start with a run on the bank by its funders. This is what we term a liquidity crunch - interbank markets freeze, banks bonds funding streams dry out. Only after that can the depositor run develop, usually starting with corporate depositors. Funny enough - the ESRB wouldn't say it out-loud, but in effect it already called in the above statement a bank run in funding markets. Worse, we also know - from the likes of Siemens transaction reported here (http://trueeconomics.blogspot.com/2011/09/20092011-eu-banks-losing-corporate.html ) - that to some extent (unknown) corporate deposits run might be taking place as well. Next?

"The high interconnectedness in the EU financial system has led to a rapidly rising risk of significant contagion. This threatens financial stability in the EU as a whole and adversely impacts the real economy in Europe and beyond."
Boom!

So, per ESRB:
"Decisive and swift action is required from all authorities. In the immediate future this includes:
* implementing, fully and rapidly, the measures agreed upon at the 21 July meeting of the Heads of State or Government of the euro area;
* adopting sustainable fiscal policies and growth-enhancing structural measures so as to achieve or maintain credibility of sovereign signatures in global markets; and
* enhancing the coordination and consistency of communication.
Now, I am not a fan of July 21 decisions, primarily because they do not address the core issue of the crisis - too much debt in the system and too little growth. EFSF purchasing sovereign bonds and lending to insolvent states is not going to reduce the debt pile accumulated by European Governments. Nor will extending maturity and lowering interest rates on its loans help improve economic situation in PIIGS and beyond. So I would disagree with ESRB on the first bullet point.

Calling for adoption of sustainable fiscal policies and growth enhancing measures is like telling a person sinking in a bog to pull harder on his hair. Fiscal sustainability is not being delivered in any of the PIIGS so far, and there is absolutely no appetite for any Government in Europe to take properly drastic measures required to get their finances on sustainable path. Even the very definition of sustainability used by EU is a mad one (let alone not a single state actually adhered to it so far with exception of Finland). A deficit of 3% pa means that you get to 100% debt/GDP ratio in longer time than with a deficit of 5% pa. But you will still get there, folks. Debt to GDP ratio of 60% is only sustainable if, in the environment of 3% 10-year yields your economy expands by more than 1.8% pa (assuming no population growth and no amortization and depreciation under balanced budget). That has not happened in the euro zone in any single 10 year period since we have full data for its members.

Growth-enhancing measures adoption is another case of pure 'wishful' thinking. In most of the Euro area and indeed in the EU Commission, this usually means more subsidies and more state spending. In parts of Central and Eastern Europe it usually means promoting real private sector competition and investment. Of course, we know who weathered the storm best in the last two recessions. But, hey, ESRB wouldn't make a call as to what it means by this "adopting... growth-enhancing measures" despite the fact that much of "growth enhancements" unleashed on euro area economies in recent past is precisely what got us into the current sovereign debt mess in the first place.

As per its last bullet point, one starts to wonder if ESRB is going down the slippery line of 'rhetoric ahead of action'. What does "enhancing the coordination and consistency of communication" mean? All of the EU policymakers 'speaking with one voice'? Curtailing or otherwise minimizing dissent? Controlling information flows? What the hell, pardon my French here, does it really mean, folks?

On a beefy ending, ESRB prescribes that: "Supervisors should coordinate efforts to strengthen bank capital, including having recourse to backstop facilities, taking also into account the need for transparent and consistent valuation of sovereign exposures. If necessary, this could benefit from the possibility for the European Financial Stability Facility to lend to governments in order to recapitalise banks, including in non-programme countries."

I am sorry to say this, but if anyone reading this is going to vote in the Dail on the European Financial Stability Facility and Euro Area Loan Facility (Amendment) Bill 2011 you really have to understand this statement. In effect, ESRB here welcomes loading of the risks of insolvent banking systems - including in non-programme countries - into one single facility, the EFSF, which will have preventative powers to intervene in the markets to buy distressed debts of banks and sovereigns. In a sense, EFSF will become a super-dump - a motherload of super toxic financial refuse from both radioactively insolvent sovereigns and biochemically toxic banks. You wouldn't want THIS anywhere near your local constituency.

21/09/2011: Risk focus swings?

What gives, folks:

Tables below show the swing in risk assessments away from PIIGS to net contributors to the EFSF/EFSM/ESM alphabet soup concocted by the EU to powder over the gaping wounds left by the earlier stages of sovereign debt crisis. Why?

Absent long-term trend we can only speculate, but can it be the ever-widening liability being loaded on Finland, Austria and Netherlands under the current euro area 'burden-sharing' arrangements? Or are the markets re-assessing the prospects for the euro bonds?

14/09/2011: Ireland & Portugal are allowed to restructure some of their sovereign debts

The EU Commission issued its proposals for altering terms and conditions of loans extended under the EFSM (and same is expected for EFSF). The details of release are here.

The move comes after July 21 EU summit agreement to alter these terms and took surprisingly long to deliver. This has nothing, I repeat - nothing - to do with the claimed efforts by the Irish Government to secure similar reductions over recent months. The reductions come on the foot of the EU-wide deal for Greece.

Per Commission statement: "The Commission proposes to align the EFSM loan terms and conditions to those of the long standing the Balance of Payment Facility. Both countries should pay lending rates equal to the funding costs of the EFSM, i.e. reducing the current margins of 292.5 bps for Ireland and of 215 bps for Portugal to zero. The reduction in margin will apply to all instalments, i.e. both to future and to already disbursed tranches."

Two critically important points here:

• The reductions, especially for Ireland, are significant in magnitude and will improve Ireland's cash flows and net small reduction in debt burden over time. However, much of these are already factored in recent debt and deficit projections.
• The reductions are retrospective, which is a very important point for Ireland.

Further per EU Commission statement: "...The maturity of individual future tranches to these countries will be extended from the current maximum of 15 years to up to 30 years. As a result the average maturity of the loans to these countries from EFSM would go up from the current 7.5 years to up to 12.5 years."

Two more important points follow from the above:

• Extended maturity in combination of lower coupon on borrowings imply significant cuts in NPV of our debt from EFSM, which, in turn, means that under current EU Commission proposal we will undergo a structured credit event (aka - an orderly default). When this course of action was advocated by myself and others calling for the Irish government to force EU hand on providing for structured default, we were treated as pariahs by the very same 'green jersey' establishment that now sings praise to the EU largess.
  
• Second point is that, as I have noted back in July, this restructuring implies longer term maturity period and can result in total net increase in our overall debt repayments, were we to delay implementation of austerity measures. The silver lining, folks, does have a huge cloud hanging over it.

Lastly: "...the new financial terms will bring benefits such as enhanced sustainability and improved liquidity outlooks. Moreover, indirect confidence effects through the enhanced credibility of programme implementation should result in improved borrowing conditions for the sovereign as well as the private sector."

In effect the above implies that absent such reductions and maturity extensions, Ireland and Portugal are unable to remain on a "sustainable" path and/or lack or experience a deficit of "credibility" whne it comes to their adjustment programmes. That, of course, is plainly visible to all involved.

So here we are, folks - we now had:

1. Bank defaulting on some of its liabilities - and cash machines kept on working
2. Government undergoing debt restructuring - and cash machines keep on working.

Not the end of the world, is it?

05/09/2011: Ackermann: cover us

Deutsche Bank CEO, Josef Ackermann, speaking today at a conference "Banks in Transition", organized by the German business daily Handelsblatt in Frankfurt, made some far reaching comments on the state of European banking system.

"We should resign ourselves to the fact that the 'new normality' is characterized by volatility and uncertainty... All of this reminds one of the autumn of 2008." And as a reminder of these very days 3 years ago, the ECB reported that banks have raised their overnight deposits with ECB to €151 billion - the highest level in more than 12 months. Overnight deposits with ECB are seen as a safe haven as opposed to lending money in the interbank markets, with latest spike suggesting that even European banks are now becoming weary of lending to each other.

Crucially, according to Ackermann, "it is an open secret that numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels" to reflect their current market value. This is an interesting point - not because it is novel (every dog in the street knows that to be true), but because it is being made by the man who leads the largest banking institution in the land where banks have vigorously fought EBA on methodology and disclosure of stress test results. The battle line drawn back then was precisely their sovereign bond holdings.

And there is an added contradiction in what Ackermann was saying - if banks in Europe will not survive mark-to-market revaluation of their books, then how come Mr Ackermann claims they don't require urgent recapitalization?

In truth, Ackermann was really saying that were the banks in Europe forced to mark-to-market their holdings of PIIGS and Belgian bonds, they would take such losses that can lead to destabilization of banks equity valuations across the EU, thus triggering calls on governments' funding, which will therefore destabilize the bonds markets. Truth hurts, folks. It hurts over and over again when it is denied.

Mr Ackermann also appears to be saying: "Hey politicians. Don't force us to fix our books to the market. Fix the market for us."

Ackermann also repeated his earlier statement that calls for robust and rapid recapitalization of the banks were "not helpful" and threatened to undermine European efforts to assist crisis-stricken euro-zone sovereigns. In his view, such a recapitalization would send the message that the EU had little faith in its own strategy for dealing with the crisis. In other words, in Ackermann's view, if banks need urgent capital to cover losses on sovereign bonds, then the current valuations of these bonds in the market are irreversible. Which, of course, would mean that all efforts of the EU to roll back sky-high yields on PIIGS + Belgian debt are not likely to produce long-term results any time soon.

Which brings us to the point of asking: if so, why the hell are we burning through tens of billions of ECB and taxpayers' funds to buy out sovereign bonds and repay banks bond holders? Is it simply an exercise of buying time?

Another interesting comment from Ackermann relates to longer term prospects of the banking sector: "Prospects for the financial sector overall ... are rather limited... The outlook for the future growth of revenues is limited by both the current situation and structurally." What this means is that with regulatory tightening, new capital requirements (both on quality and quantity of capital) and with devastated savings and investment portfolia of investors, plus rising taxes on income and capital, margins in the banking sector will be depressed over long term horizon, while more risk averse investors will be weary of buying into higher margin high risk structured products.

In other words, all that Mr Ackermann's speech today amounts to is a call by a banker on the European governments to cover up the banks' cover up of losses: "Print money, buy out our bonds, but don't restructure or recapitalize us".

But Ackermann's warning presents an even more dire warning for the Irish officials who have made significant bets (using taxpayers money) on Irish banking sector returning to high rates of profitability soon. If Ackermann is correct and long term profitability of the entire sector is on decline, Irish banks will be unlikely to recover without a dramatic restructuring of their books.

31/08/2011: Europe's economic, business & consumer confidence sink in August

Following a precipitous collapse of the US consumer confidence this month (see posts here and here for details), the EU has just posted a series of consumer, business and economic sentiment indicators that are showing a massive drop in overall economic activity across the board. Here are the details.

Starting with Economic Sentiment Indicator (ESI) first:

• August ESI reading for EU27 came in at 97.3 (contraction territory) down from July 102.3. 3mo MA for the index is now at 101.4 and yoy the index is down 5.7%.
• Euro area ESI is also in contraction zone at 98.3 for August, lowest since May 2010, down from 103.0 in July and off 3.8% yoy. 3mo MA of the series is now at 102.2.
• ESI for Germany is still in expansion at 107.0 in August, but down from 112.7 in July and down on 3mo MA of 111.4. The index is now down 3.1% yoy. This is the lowest reading since July 2010.
  
• ESI for Spain is showing deeper contraction in August, reaching 92.7, down from July 93.0 and registering uninterrupted contractionary performance since (oh, sh**t) September 2007. ESI, however is up in Spain yoy by 1.6%.
  
• ESI for France latest reading is at 105.9 for July, which was down from 107.4 in June.
• ESI for Italy signals recession at 94.1, down from 94.8 in July and off 4.8% yoy. 3mo MA is at 96.1 and the index has remained in contraction zone for consecutive May 2011.

Two charts to illustrate - one of complete historical series, and one of a more recent snapshot:
What the historical series show is a worrisome trend:

• Before January 2001, Euro area average ESI reading was 102.1, post-introduction of the Euro, the average reading is 98.9. This implies a swing from shallow expansionary optimism in pre-Euro period average, to a shallow pessimism in post-Euro introduction period.
• In Germany, prior to 2001, the average ESI was 103.9 and post January 2001 the average stands at 98.0
• In Spain, prior to 2001, the average ESI was 101.9 and post January 2001 the average stands at 98.7
• In France, prior to 2001, the average ESI was 99.4 and post January 2001 the average stands at 101.9 - the only major economy to buck the trend
• In Italy, prior to 2001, the average ESI was 101.5 and post January 2001 the average stands at 99.5

Next, consider the Consumer Confidence Indicator (CSI):

• CSI for the EU27 has fallen from -12 in July to -17 in August, the lowest reading since September 2009 and well below 3mo MA of -13.4. In August 2010 index stood at -11.
• CSI for Euro area is also at -17 in August, down from -11 in July.
  
• August reading is the lowest since June 2010, as Euro area consumers are generally less optimistic than the EU27 average. EU27 average historical reading is -11.1 and Euro area average historical reading is -12.0. Prior to January 2001 the historical averages were: -10.7 for EU27 and -11.3 for Euro area. post-introduction of the Euro, average historical readings are now at -11.7 for the EU 27 and -13.1 for the Euro area, suggesting that the Euro introduction was not exactly a boost to consumer confidence in either the EU27 or in the Euro area.
  
• Germany's CSI came in at +0.5 in August, down from 1.4 in July. The index is now well below 3mo MA of 1.1 but is well above -3 reading attained a year ago.
• Spain's CSI is now at -17, down from -13.4 in July and below 3mo MA of -14.1. In August 2010 the index stood at -19.8, so there has been a yoy improvement in the degree of consumer pessimism.
• France's CSI stands at -18.4 (recall that France is the only large Euro area economy with strong focus on consumer spending) in July (latest data), down from 17.60 in June and an improvement on -25.8 yoy.
• Italy's CSI is reading at -28.8 in August, down from -27.4 in July, down on -26.6 3moMA and well below August 2010 reading of -21.3.

Again, two charts to illustrate:

Some historical trends concerning the Consumer Confidence Index:

• As noted above, consumer confidence had shifted, on average, from cautious optimism in pre-Euro era to cautious pessimism since January 2001.
• In Germany, before January 2001, consumer pessimism (average) stood at -7.26. Post January 2001, the average pessimism became deeper at -10.83. In effect, then, that 'exports-led' economic growth model for Germany has meant the wholesale historical undermining of consumer interests.
• In Spain and Italy, the picture of long-term historical trends is identical to Germany, with levels of pessimism being higher than in Germany across entire history.
• In France, consumer pessimism in pre-2001 period stood, on average, at -19.36 - deeper than in other Big 4 EU economies. Post 2001, average pessimism actually declined to -16.94, still the heaviest level of pessimism (on average) across the Big 4 economies.

Lastly, consider Business Confidence Indicator (BCI):

• EU27 BCI has fallen from +0.1 in July to -2.50 in August, hitting the lowest reading since July 2010. The index is now down compared to +0.17 3mo MA and is below -2.10 reading in August 2010.
• Euro area BCI has declined from +0.90 in July to -2.90 in August, behind +0.5 3mo MA. A year ago, BCI reading was -2.60, making current reading the lowest since July 2010.
• Germany's BCI has declined from +9.60 in July to +4.60 in August, behind +8.67 3mo MA. A year ago, BCI reading was +3.80, making current reading the lowest since September 2010.
• Spain's BCI remained unchanged in August at -13.90, behind +-12.27 3mo MA. A year ago, BCI reading was -13.0, making current and previous month readings the lowest since June 2010.
• France's BCI has declined from +5.10 in June to +0.8 in July (latest data), making the latest reading the lowest since December 2010.
• Italy's BCI has declined from -4.50 in July to -4.80 in August, behind -3.93 3mo MA. A year ago, BCI reading was -7.0.

Historically:

• Business confidence readings averaged -5.62 across the EU27 in pre-2001 period, and have since then fallen to -6.77 average reading for the period post-2001. BCI for the Euro area averaged -5.60 in pre-2001 period and -6.23 in post-2001 period. This, again, shows that the introduction of the Euro did not have a positive effect on business confidence.
• In Germany and Italy, pre-2001 BCI averages were better than post-2001 averages, while in Spain there was an improvement in the levels of business pessimism post-2001. In France, pre-2001 average BCI was -6.59 and post-2001 average BCI is -6.41 - implying statistically identical readings.
  

28/08/2011: Eurocoin August 2011 - signalling sharp contraction

Euro area leading economic indicator, eurocoin posted a sharp contraction in August, confirming rapid slowdown in the economic activity.

• Eurocoin fell from 0.45 in July 2011 to 0.22 in August, a drop of 51.1% - the sharpest since August 2008. This marks third consecutive month of declines.
• Eurocoin 3-mo running average is now at 0.40 and 6-mo average at 0.50. Year on year, the indicator is down 40.5%.
• The leading indicator is now reading within the band of 1/2 standard deviation from zero, making current growth reading virtually indistinguishable from stagnation.
• The indicator is now at the lowest level since September 2009.
  

• Annualized rate of growth is now running at 0.88%.
• Inflation - per ECB latest data, is running around 2.5%.

Updated charts relating Eurocoin to the ECB policy rates show lower expected fundamentals-determined repo rate at 2.5-3.5% based on Eurocoin and 2.75-3.25% based on HICP - both well ahead of the current rate of 1.5%.
The core drivers for Eurocoin decline in August were:

• H1 2011 growth rates (see earlier post here)
• H1 2011 slowdown in industrial production - impacting Germany and Italy and contraction in industrial production in France and Spain
• PMI Composite indicator through July 2011 showing contracting activity in the Euro area and in particular - Italy and Spain, plus significant deterioration in German business confidence (see detailed post here) and close-to-contraction reading in France
• Consumer confidence remaining in contractionary territory for the Euro area and, specifically, for France, Italy and Spain
• Sharp sell-offs in the stock markets across all 4 major economies, and
• Zero growth in exporting activity in the Euro area, with sharply falling exporting activity in Germany, zero exports growth in France, near zero growth in Italy and contracting exports in Spain
  

In short, all components of growth forecast are showing substantial deterioration, with 3 out of 5 main headline readings in contraction and 2 main readings in zero growth ranges.

25/08/2011: National forecasts and systemic upward biases

New research, published today by NBER shows that national growth and budget forecasts in the Euro area tend to overestimate growth and revenue stability than in other advanced economies and are prone to provide more biased estimates in the period of economic expansion.

The paper, titled Over-optimism in Forecasts by Official Budget Agencies and Its Implications, and authored by Jeffrey A. Frankel of the Kennedy School of Government, Harvard University and published as NBER Working paper 17239 (link here):
"... studies forecasts of real growth rates and budget balances made by official government
agencies among 33 countries.

In general, the forecasts are found: (i) to have a positive average bias, (ii) to be more biased in booms, (iii) to be even more biased at the 3-year horizon than at shorter horizons.

This over-optimism in official forecasts can help explain excessive budget deficits, especially the
failure to run surpluses during periods of high output: if a boom is forecasted to last indefinitely, retrenchment is treated as unnecessary."

In contradiction to the Franco-German recent mantra on fixed and centralized budgetary systems, the author states that: "Many believe that better fiscal policy can be obtained by means
of rules such as ceilings for the deficit or, better yet, the structural deficit. But we also find: (iv) countries subject to a budget rule, in the form of euroland’s Stability and Growth Path, make official forecasts of growth and budget deficits that are even more biased and more correlated with booms than do other countries. This effect may help explain frequent violations of the SGP."

In contrast, own budgetary discipline and honesty in forecasts pays off: "One country, Chile, has managed to overcome governments’ tendency to satisfy fiscal targets by wishful thinking rather than by action. As a result of budget institutions created in 2000, Chile’s official forecasts of growth and the budget have not been overly optimistic, even in booms. Unlike many countries in the North, Chile took advantage of the 2002-07 expansion to run budget surpluses, and so was able to ease in the 2008-09 recession."

13/08/2011: The Swiss Franc dilemma

If you are wondering why Swiss Central Bankers are growing increasingly alarmed at the precipitous rise of the Swiss Franc, consider the following charts based on the real effective exchange rate (REER).

Take first a look at the historical relationship between the Swiss REER and the peer rates:
According to chart above, which is based on the data from the Bank for International Settlements and takes us through June 2011, Euro area REER stood at 106.49 in June 2011, up from 101.53 in January and from 100.83 in June 2010. Euro area REER index was at 105.96 in January 2010. In contrast, Swiss REER stood at 122.60 in June 2011, up from 115.36 in January 2011, 106.80 in June 2010 and 104.9 in January 2010. That means since January 2010, Swiss REER index rose 16.87% while Euro index rose just 0.5%.
Using historical (1965-present) time trends, Swiss REER should be at 109.95 in June 2011 against the actual 122.60 level - an over-valuation on trend of 11.51%. At the same time, Euro REER should be at 99.95 against 106.49 actually posted in June 2011 - an overvaluation of 6.54% on long-term trend. Again, the problem is in the Swiss side of the court.

Taking a shorter horizon look: from 2000-present - Swiss REER should be currently around 104.12 - implying an overvaluation of 17.75%, while the Euro should be at 112.32, implying Euro undervaluation of 5.19%. Hence, Swiss problem is even greater over more recent period of time. In reality, trends since 2000 clearly show that Swiss franc should be competitive vis-a-vis the Euro. And of course, it's strength means it is not.

Next, consider the gap between the euro and the other REERs for the countries in direct competition with Switzerland for trade and investment. Charts below summarize historical trends:
In some periods in the past, countries above acted as 'safe havens' for Euro area tribulations. Let's take a look at where these countries stand today compared to Euro REER:

• Australia's REER is now at a premium of 23.15% on the Euro, down from January 2011 premium of 26.12%. Australia did not act as a safety zone vis-a-vis the Euro in the 1990-2006, but started acting as a safe haven since 2006 and currently leads the pack of safe havens in terms of absolute premium on the Euro REER.
  
• Canada REER stands at 10.41% premium on the Euro REER and this premium has declined from 15.31 in January 2011, but is up on January 2010 premium of 0.36%. Canada acted as strong safe haven against the Euro in the recession of the early 1990s, low range safe haven in the slowdown of 2001-2002 and a decent safe haven against Euro performance in 2006-2008. It is now the 4th strongest safe haven for the Euro since June 2011 and amongst top four safe havens since 2010.
• Hong Kong is a historically strong safe haven for the Euro, but is currently at a discount on the Euro REER of 17.63% - the discount that has been growing in size since June 2010 when it stood at 3.27%, although the change is marginal on the discount of 15.96% back in January 2010. Hence, Hong Kong is not a safe haven for the Euro at this point in time.
• Japan is a weak safe haven for the Euro REER today with a premium of 3.64%, down from a stronger premia in January 2011 (+10.86%), June 2010 (9.81%), but up on the discount of 5.87% in January 2010.
• Korea's REER index is currently at 17.00% discount on Euro's index and the discount is consistently high since January 2010 when it stood at 21.23%. Korea acted as a strong safe haven for the Euro in all periods since mid 1990, although it was relatively weak in the early 1990s recession.
• New Zealand currently has REER at a 5.59% discount on the Euro REER index, but the discount was much weaker at 1.69% in January 2011 and is now down from the high discount of 13.55% in January 2010. New Zealand is not a safe haven for the Euro historically since 1965.
• Norway, despite being a perceived as a safe have for nominal bilateral exchange rate is not a safe haven for the Euro in terms of REER. It's discount on Euro REER of 4.85% in January 2010 moved to a premium of 3.90% in June 2010 which remained at a premium of 3.33% in January 2011. Currently, it is back at a discount, albeit shallow, of 1.23%. Norway did act as a safe haven,even a strong safe haven, in the past episodes of Euro area instability, so the current departure from this pattern can be temporary.
• Singapore is now at 19.43% premium on the Euro REER index and this premium is consistent since June 2010 when it stood at 21.15%, although January 2010 reading for the premium was just 4.45%. Singapore is now the second strongest safe haven for the Euro area REER movements after Australia.
• Switzerland is now one of the top 4 strongest safe havens for the Euro with the premium of 15.13% on Euro REER. More importantly, it is the second best safe haven over the period of 1990-present after Singapore and the same is true for the broader range of periods, from the 1980s through today.
• Both the UK (discount of 22.86% today, and 25.45% in January 2010) and the US (discount of 16.51% today and 14.83% in January 2010) fail to act as safe havens for the Euro REER in the current crisis, although in previous periods between 1965 and 2007 they did act as safe havens against the Euro REER.

Chart summarizing current safe havens vis-a-vis Euro REER index:
Lastly, equally important is the factor of risk / volatility. As the two charts below clearly show, Switzerland is not only one of the strongest 4 safe havens in the world when it comes to hedging REER risk on the Euro area, it is also one of the historically less volatile (since 1990s - second in quality only to Singapore and least volatile since 1965). In fact, since about 1982 on it is less volatile than Euro area as a whole.
This, therefore, is the dilemma faced by the Swiss Central Bank today: debase the currency in terms of its value (less controversial, though still hard to attain for a small open economy - see a post on this here), plus debase the stability of the CHF (an even harder and more painful thing to achieve), or continue experiencing deteriorating competitiveness on exports side.