Markets update - Credit - Mind the Gap...

"There is a time to take counsel of your fears, and there is a time to never listen to any fear."
George S. Patton

Following our previous post relating to the "Italian Peregrine Soliton", it was interesting to read about Grant Williams comparable analogy relating to the freak wave that sank the Big Fitz in John Mauldin's latest Outside the Box, with our Italian "rogue wave-soliton".
In fact we could go further into the analogy relating to the "three sisters" rogue waves that sank SS Edmund Fitzgerald - Big Fitz, given we are witnessing three sisters rogue waves in our European crisis, namely:
Wave number 1 - Financial crisis
Wave number 2 - Sovereign crisis
Wave number 3 - Currency crisis
In relation to our previous post, the Peregrine soliton, being an analytic solution to the nonlinear Schrödinger equation (which was proposed by Howell Peregrine in 1983), it is "an attractive hypothesis to explain the formation of those waves which have a high amplitude and may appear from nowhere and disappear without a trace" - source Wikipedia.

But I ramble once again, and given poor liquidity, and recent price action it is time for another credit overview. In the process we will review the unfolding scenarios we have been discussing in recent months, namely liquidity issues leading to a financial crisis, contagion to Emerging Markets (Eastern Europe in the front line), bond tenders and more. So, yet another long conversation.

The Credit Indices Itraxx overview - Source Bloomberg:

We still have high volatility, with Itraxx Credit Indices experiencing big price movements, in an environment where liquidity is definitely dwindling.
A market maker in fact commented on today's price action:

"One of the worst days of the year in terms of flow biz if it can be considered that anymore. A difficult environment to trade with clients mostly on the sidelines watching the Hollywood horror flick become a reality as SOV cash got decimated, particularly in the front end. Underperformers today the Italian/French/Iberian names which closely followed the Sovs. Even names like RBS & Lloyds SUB which are considered the "hairier" of the UK names failed to widen as much."

European Financials wider:

Italian Financials 5 year CDS were wider by around 70 bps on the day with Senior Financials CDS trading from 495 bps up to 760, depending on the Italian bank.
Spanish Financials 5 year Senior CDS were wider as well (BBVA +90 bps, Santander +80 bps).
French Senior Financial 5 year CDS also took a severe beating with Credit Agricole wider by 55 bps to around 570 bps, Societe Generale wider by 30 bps to around 370 on the 5 year Senior 5 year point and BNP Paribas wider by 55 bps to around 300 bps on 5 year Senior.

The issue of circularity for financial spreads and correlation with sovereign spreads is alive and well:


In relation to the bond picture, contagion has been spreading to core Europe with France drifting wider still - source Bloomberg:

And, if we only look at core Europe, it seems Austria is effectively now drifting in tandem with France towards 4% yield with core Europe now only made of Netherlands, Finland and Germany - source Bloomberg:

We previously discussed Austria's banking issues relating to Eastern Europe exposure, namely Hungary in our previous post "Long hope - Short faith" and why I was closely monitoring the situation.
On the 11th of October I indicated:

"I am expecting Austria's sovereign CDS to trade wider than France at some point, given the exposure of Austria's banking sector to Eastern Europe and in particular Hungary where a new law has been passed allowing foreign currency mortgages borrowers in Hungary to repay their loans at a fixed exchange rate with large discounts to current FX market rates, which will trigger losses to Austrian Banks."

In relation to the Hungarian situation we discussed a month ago:

"Under the new legislation borrowers can repay their mortgage in a single instalment at a HUF/CHF rate of 180 or a HUF/EUR rate of 250. Current FX rates are around 239 for HUF/CHF and HUF/EUR is around 297, a 25% and 16% discount according to CreditSights."

HUF/EUR rate was 297 at the time, and is now much higher (315), meaning losses for European banks and in particular the likes of Austrian Erste Bank exposed to these mortgages will be significantly higher - source Bloomberg:

In our conversation "Leda and the (Greek) Swan and why Europe matters more for Emerging Markets", we indicated that "European banks’ lending to Hungary amounted to more than 70 percent of that country’s GDP, according to estimates by Barclays Capital based on BIS data. Lending to Poland reached 40 percent of GDP, and that to Brazil and Mexico was equal to about 20 percent of their economies." Following up on our Austrian conversation, it is interesting to see it followed up by Eric Frey from the Financial Times - "Austria moves to defend top rating" as well as by Geoffrey T. Smith from the Wall Street Journal - "Austria Has a Déjà Vu Moment":

"Austrian banks’ foreign assets at the end of 2010 were 137% of domestic GDP, according to Raiffeisen Zentralbank.

Data published in the European Banking Authority’s stress tests showed a combined exposure of around €210 billion to central and Eastern Europe, although that excludes loans made to the region through Unicredit SpA’s local subsidiary, Bank Austria.

Those assets have generated stellar growth over the last 15 years for the banks, but a small domestic economy can hardly underwrite them if things turn sour.

By contrast, the Bank for International Settlements suggests that Austria’s exposure to the five most indebted countries of the euro zone is relatively modest, with even Italy accounting for no more than €18 billion.

As a result, the biggest threat to Austrian banks is still what it was in 2009—wholesale capital flight from emerging Europe."

In relation to the deleveraging risks for Emerging Markets coming from European banks we discussed on the 2nd of November, Morgan Stanley in a report published on the 13th of November entitled "What Are the Risks of €1.5-2.5tr Deleveraging?" had to say the following:

"Contagion to EM is a key risk, although our concerns centre on CEE/SEE rather than Asia. 12 of the 16 major European banks in CEE (~78% of these banking assets) either had a capital shortfall in the recent 9% test or are TARP recipients. We expect the greatest strain in SEE. In contrast, while we see growing risks to global trade finance – French banks looking to reduce dollar dependency represent 25% of outstandings – our assessment is that in a more orderly scenario this will be passed to local banks or globals (HSBC, STAN, C, JPM) although clear risks if disorderly."

The Morgan Stanley report was also quoted in relation to the heightened possibility of a Credit Crunch in Europe by Lisa Pollack in ft.com/Alphaville in "It’s a capital ratio of two halves" who has been following up on our post "Leda and the Greek Swan" (published by Pragmatic Capitalism courtesy of Cullen Roche) in relation to the impact of deleveraging.

The truth is that the liquidity picture is not improving, it is sliding still - source Bloomberg:

We have discussed at length upcoming term funding issues (in our post "Complacency"), and why liquidity issues always trigger financial crisis.

Morgan Stanley in their report commented:

"Bank funding roll is considerable – €1.7tr of debt due to refi for the major banks in the next three years. We think a step change in the pricing and availability of senior unsecured debt as well as dollar funding challenge many businesses. Whilst intense ECB support has helped, lack of a temporary bank debt guarantee plan is unfortunate, we feel.

Funding is no small issue. European banks lost $100bn of CP over the summer alone – making some major European banks more dependent on the ECB for funding. Given the dollar is the functional currency of global trade, this will impact European banks’ ability to be global lenders."

In relation to the issue of circularity, Morgan Stanley has come up with an interesting illustration - Source Morgan Stanley Research:

In fact financial stocks performance has been deeply correlated to Sovereign risk according to Morgan Stanley research:

We already know how difficult term funding issuance has been in recent months and is an ongoing problem moving towards 2012 - source Morgan Stanley Research:

Itraxx Financial Senior 5 year CDS index evolution versus Itraxx Financial Subordinate 5 year CDS index - source Bloomberg:

Moving back towards the widest levels reached in September.

Here is Morgan Stanley's take on the subject:

"• Term markets have stuttered throughout the summer, unable to regain the momentum of H1; there have been ~30 covered bond deals and a handful of senior unsecured since late August.
• However, our 2011 funding survey shows that European banks are now 100% funded on average, having frontloaded their issuance inH1.
• Notably, the Nordics and BNP have prefunded some of 2012.
• But given the sector has ~€700bn of rolling debt in 2012, we see headwinds if funding conditions persist, resulting in a pick-up in the velocity of delevering and further compression of NII (Net Issuance)."

In that context, it is of no surprise to see a rise in bond tenders (on that subject please refer to our post "Subordinated debt - Love me tender?") , in fact Spanish bank Santander just announced a bond tender on 9 callable LT2 bonds:

Santander Issuances, S.A. €1,500,000,000 - Exchange ratio 90.50 (%)
ISIN - XS0291652203 - Callable Subordinated Step-Up Floating Rate Instruments due 2017
Santander Issuances, S.A. €550,000,000 - Exchange ratio 90.00 (%)
ISIN - XS0261717416 - Callable Subordinated Step-Up Floating Rate Instruments due 2017
Santander Issuances, S.A. €1,500,000,000 - Exchange ratio 90.00 (%)
ISIN - XS0327533617 - Callable Subordinated Lower Tier 2 Step-Up
Fixed/Floating Rate Instruments due 2017
Santander Issuances, S.A. £300,000,000 - Exchange ratio 88.00 (%)
ISIN - XS0284633327 - Callable Subordinated Step-Up Fixed/Floating Rate
Instruments due 2018
Santander Issuances, S.A. €500,000,000 - Exchange ratio 88.00 (%)
ISIN - XS0255291626 - Callable Subordinated Step-Up Fixed/Floating Rate
Instruments due 2018
Santander Issuances, S.A. €500,000,000 - Exchange ratio 87.00 (%)
ISIN - XS0301810262- Callable Subordinated Step-Up Fixed/Floating Rate
Instruments due 2019
Santander Issuances, S.A. €449,250,000 - Exchange ratio 99.50 (%)
ISIN - XS0440402393- Callable Subordinated Lower Tier 2 Step-Up
Fixed/Floating Rate Instruments due 2019
Santander Issuances, S.A. £843,350,000 - Exchange ratio 94.00 (%)
ISIN - XS0440403797- Callable Subordinated Lower Tier 2 Step-Up
Fixed/Floating Rate Instruments due 2019
Santander Issuances, S.A. €500,000,000 - Exchange ratio 87.00 (%)
ISIN - XS0201169439- Callable Subordinated Lower Tier 2 Step-Up
Fixed/Floating Rate Instruments due 2019

In our new Santander proposed haircuts, bond holders have until the 23rd of November to decide if they want a new "hairstyle".

Not even our CPDO/EFSF has been successful in raising recently much needed funding to help out on the ongoing European debt crisis, in fact, 10 year French Government bonds are yielding now for the first time above June issued 10 year EFSF bond - source Bloomberg:

It looks like the EFSF is too late to be materially effective in preventing contagion to spread in Europe.

So, given what we know so far, with heightened volatility, liquidity dwindling and European solitons, as in indicated in our previous post, please "mind the gap" - source Bloomberg:

There is still a disconnect between the 10 year German Bund and the Eurostoxx, while it had been moving in lockstep until recently, it appears the divergence between both still does not look correct, and warrant caution.

On a final note I leave you with the European Zew Indew, relating to European investor and analyst expectation - source Bloomberg:

"The ZEW center in Mannheim Germany said today its index of investor and analyst expectations, which aims to predict developments six months in advance, declined to minus 55.2 from minus 48.3 in October. That’s the lowest since October 2008." - Source Bloomberg.

"If we take the generally accepted definition of bravery as a quality which knows no fear, I have never seen a brave man. All men are frightened. The more intelligent they are, the more they are frightened."
George S. Patton

Stay tuned!

Markets update - Credit - Rates - Equities - U can't touch this...Hammer time...

I told you homeboy u can't touch this
Yeah that's how we're livin' and you know u can't touch this
Look in my eyes man u can't touch this
You know let me bust the funky lyrics u can't touch this

MC Hammer - U can't touch this lyrics

Markets in a spin again, equities, you definitely can't touch this...It's hammer time in the markets!

10 year German Government Bund still experiencing flight to quality:

In the two year government bond space, Greece widening again:

In the Credit Space, credit indices widening as well:
Itraxx Crossover 5 year index:

Itraxx Financial Sub 5 year index (synthetic index comprising subordinated CDS levels of European Banks, the reference bonds in these CDS being subordinated debt):

and Italy's sovereign CDS and Government bond spreads an ongoing concern:

Italian Financial Senior 5 year CDS widening as well:

France 5 year Sovereign CDS is quoted at 135 bps.

Meanwhile the aggressive cut from the Swiss National Bank seemed to have had little effect on curtailing the EUR/CHF trend, here is the intraday picture:

Yen is still hanging at record low level suggesting Bank of Japan is on the lookout, we are at intervention levels but what kind of intervention?

Gold reaching a new record, here is the intraday move:

No more Ipads for the US consumer as per Bloomberg's Chart of the day:

And US consumption is 70% of US GDP. It is called deleveraging.

The other chart of the day, again from Bloomberg is more worrying as it shows the average Debt/Ebitda Ratio for closely held US companies, hold your breath it isn't pretty:

In relation to my previous post relating to the toxicity of stimulating high ownership rates, please find another "Chart of the day", from Bloomberg. As I mentioned in my post "Is the policy of achieving a high home ownership rate the biggest threat for an economy?", Australia is facing the same issues relating to its housing market as the UK have been facing and the US:

Yes indeed, house prices in Australia are over-valued and no, it's not different this time for housing and not different for LBO loan costs in Europe which, now exceeds Lehman crisis according to Bloomberg article from Patricia Kuo and Stephen Morris.

Private-Equity firms face funding costs for European LBO which exceeds even the aftermath of the Lehman collapse. Interests on loans to finance LBOs have risen to average 450 basis points more than benchmark since June, from 413 bps in the first five months. The record was at 437 bps following Lehman's demise.
But it is not LBOs that are in trouble to fund themselves. The recent rise in bond yields for Italy and Spain, spell similar funding issues.
According to Bloomberg, European leveraged loans fell to 91.08% of face value at the end of July, whereas in the US, leveraged loans stand at 94.41%. Leveraged loans are deemed High Yield and are rated below Baa3 by Moody's and lower than BBB- by S&P. The Itraxx Crossover index displayed previously is a good proxy.

The reality is slowly sinking in, everyone is competing for funding and costs will rise.

In the CMBS space, there is a disturbing trend as well:

Commercial-Mortgage Late Payments Increase to Record in July - Bloomberg

"Delinquencies on the debt jumped 51 basis points in July to a record 9.88 percent, according to real estate data provider Trepp LLC. The increase follows two months of declines, the New York-based firm said today in a statement. The jump is partly because of how loan servicers report mortgages that are in foreclosure, Trepp said."

This is very significant because it will have a very big impact on Banks level of provisions and will increase losses. It also justifies my previous stance on this blog, relating to US bank stocks and the reason to avoid them. For more on the subject, you can read what I have written on the subject: "Extend and Pretend" - Banks bloated balance sheets and the Impact of Real Estate crisis.

"Wall Street lenders may incur ”hundreds of millions of dollars” in losses as prices on commercial-mortgage bonds tumble, Barry Sternlicht, the chief executive officer of Starwood Capital Group LLC, said on a conference call with investors today for Starwood Property Trust, a unit of the firm."

And on the economic data, it was another disappointing day, Factory orders down 0.8% as durable goods decline (Highlighted above in one of the chart of the day) and ISM services slightly below consensus at 52.7, confirming the ongoing weakness in the US economy.

To be continued, now back to the bunker...

Macro and Markets update - No test, no stress, no stress, no test...

All is in the title, as clearly Mr Market has not bought into the latest results for the European banking sector stress test. EBA's assumption of a 15% loss on Greek bonds and a 1 to 2 percent "haircut" on Irish and Portuguese debt, cannot be deemed serious.

Eight European banks failed the European Banking Authority's stress test: five from Spain, two from Greece and one from Austria.
Most were smaller banks. The aggregate shortfall was measured at 2.5 bln euro, but the EBA points indicated that the system raised 50 billion euro of capital between January and April this year, for the positive side.
16 banks have a projected Core Tier 1 between 5% and 6% at end-2012. Raising the threshold to 6% would mean a shortfall of over 10 billion euro.

Stress test puts banks' euro zone debt in spotlight

"The EBA data showed banks held 98.2 billion euros of Greek bonds (67% held by domestic banks), 52.7 billion euros of Irish sovereign debt (61% held domestically) and 43.2 billion to Portugal (63% at home). Applying more realistic losses of 40% on Greek bonds and 25% on Portuguese and Irish debt would add over 45 billion euros to capital needs."

Here is the picture for Italy in the CDS space as seen on Friday:


Update on Spanish Sovereign 5 year CDS as of the 18th:

France still leading the pack of Core Sovereign CDS 5 year movement:

France is now trading above 120 bps, as I previously posted, France is now at the same level Italy was in April 2011.

Portuguese 5 year banks CDS, following the results, well as expected, wider:

As well some Italian banks in the mix:

Swaps on Spanish and Italian banks led the rise in financial debt risk, with Banco Popular Espanol SA soaring 72.5 basis points to 648 and Mediobanca SpA up 22 at 238, both records.

For the SOVx 5 year index, here is the picture of the widening we have seen so far:

As a reminder, 1/15th of the Index is made of Greece, same applies for Portugal and Ireland.

Government bonds update, the 2 year picture - it ain't pretty for some...

Greece 2 year at 31.7%, Portugal at 18.24%, Ireland at 21.5%.

And here is the 10 year Government bonds morning snapshot:

Italy 10 year now closed to 6% (highest level since 1999, new week, new record), Spain at 6.249%. Greece, at 17.2%, Portugal at 11.87% and Ireland at 13.49%.

Italy approaching 7% would be a cause of concern. The 7% mark prompted its smaller euro partners to seek bailouts, namely Ireland, Portugal and Spain and Italy's economy is three times larger than the combined three. The extra yield investors demand to hold Italian 10 year debt over German bunds widened to 3.48 percentage points last week, the most since September 1996.

The overall Itraxx indices picture this morning was wider as well:

• The iTraxx Financial Index linked to senior debt of 25 banks and insurers increased 5 basis points to 194 and the subordinated index climbed 8.5 to 338, both the highest since January.
• The Markit iTraxx Crossover Index of 40 companies with mostly high-yield credit ratings increased 10 basis points to 470, the highest since the second of December 2010.
• The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 3.5 basis points to 126.25 basis points, the highest in more than a year.

That's the latest and I haven't even mention the action on the equity space. Nasty as well.

On a final note, Bloomberg's chart of the day today was an update on the Misery index:

 A 28 year high according to ZeroHedge.

"The CHART OF THE DAY shows the correlation between the U.S.
Misery Index, or the sum of the unemployment and inflation
rates, and measures of consumer confidence."

And it is only Monday...ouch...

To be continued...unfortunately...

Markets and Macro update - "Risk Off" mode is truly on.

The balance sheet recession is still lean and mean. Macro picture remains weak. It will be essential to monitor the next ISM print on the 1st of July. If it points below 50, the US will be again in recession territory.

Great question by Steve Keen and great analysis:

Dude! Where’s My Recovery? - by Steve Keen on June 11th

The fears expressed in my blog of the risks of a double dip in the US are coming closer to realisation unfortunately.

New Home Sales in May at 319K, down from 326K in April. New Home Sales are still in the dumpster:

Take a closer look on a 5 year scale, it ain't pretty:
New One Family Houses Sold: United States

Average Sales Price for New Houses Sold in the United States - Volatile:

Initial claims going up again in the US, it isn't going to help President Obama's re-election:

Initial Claims for Unemployment Insurance rose by 9000 last week to 429000. Worse than the expected level of 413000.


In the rates and credit spaces, we had another volatile session.

Huge movement on the 10 Year German Bund government bond today, signifying a huge flight to quality move:
The 10-year German bund yield fell eight basis points to 2.86%, getting very close to a 5 months low. September bund future made a new contract high of 127.04.

Meanwhile Portuguese 2 Year notes reached a new record to 14.39%, 70 basis points wider.

Irish yields widened by 46 bps to 13.70%.

Spanish 2 Year notes widened by 16bps to 3.59%.

iTraxx SovX 5 year index reached 233 bps (record was reached on the 16th at 236bps). Greece represents 1/15th of the index as a reminder.

For Standard & Poor’s and Moody’s, a rollover of Greek debt would mean default.

And to add to the nasty sell-off Moody's warned it could downgrade 16 Italian banks including Intesa Sanpaolo, Banca Monte dei Paschi di Siena, Banca Nazionale del Lavoro and Cassa Depositi e Prestiti.

Italian Banks CDS trading wider today:


A classic scenario we've seen before, first the shots are fired accross the Sovereign country, then the banks get impacted next. Why? Banks are like second derivatives of an economy, if a country gets downgraded, so will its banks, pushing them even more into difficulties.

Whatever happens to Greece, as I posted in "European issues and the Greek jinx - Macro update, a focus on Iceland and more", its banks are in big trouble:


The ECB has threatened not to accept Greek government bonds as collateral if Greek debt was restructured. If the ECB follow through its threat, a liquidity crisis in Greece, bank runs and other social unrest on a big scale will occur, make no mistake. The AESE Greek equity index would get smoked in similar fashion as the ICEXI icelandic index got whacked given its composition and bank weighting.
A reminder from my previous post - ICEXI got obliterated:


EUR/CHF still displaying the ongoing flight to quality mode, breaking another record today: EUR/CHF hit 1.1902 during European afternoon trade, the pair's all-time low...

Also today, Oil fell 4.6% as the International Energy Agency announced the release of 2 million barrels a day for 30 days beginning next week. Looks like they want to release the pressure on US households finances with this move. A very little too late?

Europe - The end of the Halcyon days

"Hi, I'm a _______ (add country) and I'm addicted to credit."

Greece, Ireland, now Portugal:
Banco Comercial Portugues SA (SUB) 5 Year CDS:
1472 bps +194 bps on the 6th of December +15%
Banco Espirito Santo SA (SUB) 5 Year CDS:
1467 bps +137 bps wider on the 6th of December +10.36%

These were the levels we had on the 22nd of November as published in the post Dominos in Europe:

From the 22nd of November until the 6th of December, Banco Comercial Portugues SA (SUB) 5 Year CDS has moved from 974 bps to 1472 bps, a mighty 51% increase. Banco Espirito Santo SA (SUB) 5 Year CDS, has moved from 974 bps as well to 1467, similar widening of 51% of the spread.

Any similarity with what has happened with Irish Banks Sub CDS 5 Year, which jumped above 1000 bps in September, would be of course be purely fortuitous...

Italian Financials SUB Cds are widening as seen on the 8th of December:

By accepting too early to guarantee its banking system, Ireland sealed its fate and part of its Sovereignty to Europe and the IMF. Private debt from the dodgy Irish banks have been in fact transferred to the Irish taxpayers. The Black Hole in the Irish banking system is too strong to resolve the outstanding issues as I pointed out back in November (The Irish Black Hole).
According to Dr Constantin Gurdgiev in his last post, the bailout package won't be enough to save both the Irish budget and the Irish banks. Something will have to give:
Economics 6/12/10: IMF stress tests for Irish banks
"It appears that the IMF was either not given the full realistic picture of the Irish banks balance sheets, or it is seriously underestimating the demand for future losses cover in the banks."

"Either way, the numbers continue to suggest that the €67 billion package of loans will not be enough to provide simultaneously a cover for Exchequer deficits and the funds required to underwrite losses and capital requirements of the banks. Somehow, the Irish Exchequer will have to make up for this shortfall."

Either bondholders of Irish banks debt agree take a haircut on both the sub and senior debt, or the Irish Goverment will have to cut more spending, which means more austerity for the Irish people.

On the 9th of December Fitch downgraded Ireland to BBB+ from A+, which automatically means a downgrade for Irish banks as well.

The Dominos keeps falling in Europe and France will also have to face the music at some point.
"France 'next' in Euro debt
firing line" by Hysni Kaso, 6th of December.

"The country's deficit is much, much higher than anyone realises. My view is that the markets are not prepared to finance it any more unless there is serious, structural reform. No one, not even France, can hide anymore."

These were the comments made by Xavier Rolet, CEO of the LSE. Mr Rolet is right, Germany has made great stride in implementing structural reforms which are today paying off (GDP growth, lower unemployment) whereas France has postponed structural reforms for too long. Time is running out.
France is a difficult country to reform. We have recently witnessed the difficulty, with the strikes and demonstrations relating to the increase in the retirement age from 60 to 62 then 67, when, it had already been set at 67 in many European countries.

France, like many other European countries has kicked the can down the road for to long, and now is running out of road. Structural reforms are needed, but given the looming presidential elections coming in 2012, don't expect any radical reforms in France anytime soon.
The solution for Europe is binary, it is either further integration or disintegration.

Peripheral Europe which is now the politically correct term for PIIGS, represents 17% of Pan-European GDP. Core European banks have 900 Billions USD in peripheral Europe. The ECB now owns or repo 350 Billions Euros of peripheral bonds. A nice transfer from the private hands to the public hands.

Although peripheral Europe is still sinking, macro fundamentals are very good for the likes of Sweden, Germany and Norway, to name a few.

The German economy expanded 3.90 percent in the third quarter of 2010:

The Swedish economy expanded 6.9 percent in the third quarter of 2010.

The major difficulties of the ongoing crisis is due to the characteristic of this recession being a balance sheet recession. In the post "Honey I shrunk the balance sheet", I indicated that in a balance sheet recession, and due to the amount of excess, the deleveraging process is a slow and painful and the road to repair households balance sheet is indeed a very long one. In previous recoveries, the GDP growth following a recession had been much more pronounced. Due to the nature of this particular nasty recession linked to the housing bubble, the recovery is at a much smaller pace as we can see in GDP growth figures in many countries.
What is making the crisis as well more acute in Spain, Portugal and Ireland is the high private sector leverage to GDP compared to other countries: Above 150% for Portugal, around 220% for Spain and close to 300% for Ireland.

The Euro can survive provided there is stronger integration and a tougher approaches to structural issues. France and Germany led the European project from the start. Germany seems to be left on its own to drive the project forward, given the lack of progress of reforms so far in France.

Jean-Claude Juncker and Giulio Tremonti's proposal was an interesting one.
So far both Germany and France are refusing the idea of issuing Euro-bonds.
A way of reducing the burden of debt for peripheral countries, would be to create a European Compensation house and to do some debt compression. They would need to allow creditors to swap the debt of peripheral countries into more solid Euro-bonds issued at the ECB level, provided their is a haircut on the existing peripheral debt. Unfortunately the game of kicking the can down the road is still well alive with French and German politicians. At some point restructuring of the debt for some peripheral countries will have to happen.

Owed to Germany:

Countries Cross-border bank exposure: