Switzerland

In an exclusive report Zero Hedge yesterday presented the connection between the 16 BBA member banks, and something far more sinister: the sleepy, quiet (just as they want it) universe of Swiss hedge funds and private banks. One of our key focuses was on a gentleman named Michael Zrihen. We said: "So allegedly Zrihen, who now works in Geneva (keep a note of this), manipulated Libor at CA, and is now at Lombard Odier - "Geneva's oldest firm of private bankers and one of the largest in Switzerland and Europe." There is no news on whether Zrihen has been let go by Lombard Odier. Yet." We now have news. As of moments ago:

• LOMBARD ODIER SAYS MICHAEL ZRIHEN `NO LONGER TRADING'
• LOMBARD ODIER SAYS ZRIHEN JOINED THE FIRM IN DEC 2010
• LOMBARD ODIER SAYS HAS NO ROLE IN EURIBOR, LIBOR SUBMISSIONS

As a reminder, this is just the tip of the Swiss Liebor rabbit hole. Many more hedge funds will be implicated.

That Lieborgate is about to spill over and take down many more banks is well known: as previously reported that the world's biggest bank Deutsche Bank, has become a rat for the Liebor prosecution having turned sides. The reason: "Under the leniency programs of the EU, companies may get total immunity from fines or a reduction of fines which the anti-trust authorities would have otherwise imposed on them if they hand over evidence on anti-competitive agreements or those involved in a concerted practice." However, just like in the case of Barclays (with Diamond), JPM (with Bruno Iksil), UBS (with Kweku) and Goldman (with Fabrice Tourre), there always is a scapegoat. Today we find just who that scapegoat is. From Bloomberg: "Regulators are investigating the possible roles of Michael Zrihen at Credit Agricole, Didier Sander at HSBC and Christian Bittar at Deutsche Bank, the person said on condition of anonymity because the investigation is ongoing. The names of the banks and traders were reported earlier today by the Financial Times." Of course, as so very often happens, the link between the investigated firm, and the person in question no longer exists - after all what better brute way to tie up loose ends, than to fire the person in question at some point in the past: "Michael Golden, a spokesman for Deutsche Bank, confirmed that Bittar left the bank last year and declined to comment on the investigation." And since neither Bloomberg, nor the earlier FT article have any discussion of just where Mr. Bittar ended up, knowing quite well there is very likely a full-scale investigation forming into his Libor transgressions. The first place we went to, naturally, was LinkedIn, not because we expected to find his profile there: very few higher echelon bankers actually post their resumes on LinkedIn, but because we were fairly confident that the very useful function of seeing whose other profiles had been looked at in the context of even a "fake" Bittar, would provide us with clues. Sure enough that's precisely what happened.

The NIRP club, or those countries whose 2 Year (or longer) bonds trade inside negative territory as presented yesterday, is happy to welcome Finland among its ranks, following the country's 2 Year bond briefly touching on -.008% minutes ago (since "recovering" to 0.0000% briefly). Other proud member countries include Holland, Germany (which earlier issued 2 Year debt at sub zero rates for the first time ever), Denmark, and Switzerland, or Europe's AAA-list. On the other end, the peripherals continue to trade on an ever more unsustainable basis. Europe has now become one big pair trade: everyone is long the viable countries and short the... less than viable ones.

If Krugman is to be believed, the state of global sovereign nation balance sheets must be excellent as there are now 12 major nations with 2Y interest rates below 1.00% with 4 of those nations having joined the Negative-Interest-Rate-Policy (NIRP) club. Canada, Sweden, USA, UK, Japan, France, Austria, and Finland are all currently below 1.00%. Holland, Germany, Denmark, and Switzerland are all currently negative.

Escalation. The inevitable collapse of the Prisoner's Dilemma that kept the LIBOR contributors together is occurring rapidly. After Barclays' forced admission and initial fine, the 'he-who-defects-first-wins' strategy has been trumped by Deutsche Bank as they turn all 'Donnie Brasco' on their oligopolistic peers. As Reuters reports this morning "The bank last year obtained the status of being a witness for the prosecution in the EU and in Switzerland," and "as a result of that, the bank could get a lighter penalty if a punishment is imposed," though of course this does not mean they are admitting guilt (sigh). Under the leniency programs of the EU, companies may get total immunity from fines or a reduction of fines which the anti-trust authorities would have otherwise imposed on them if they hand over evidence on anti-competitive agreements or those involved in a concerted practice. How quickly the worm turns when trust leaves the system - the warning the rest of the Liebor contributors - be afraid, be very afraid.

As Euro area policymakers continue to ‘muddle through’ the crisis, everyone's favorite FX Strategist - Goldman's Thomas Stolper, summarizes the decline in the EUR so far as due to slower growth and easier monetary policy, together with growing EUR short positions. Of course, the root cause of both developments is the political crisis in the Euro area. The uncertainty about the stability of the institutional framework of the Euro area forces front-loaded fiscal tightening, which in turn damages growth. In response, the ECB eased policy more than expected, while the Fed, did not ease as much or as early as many projected. Despite today's ecstacy in EURUSD, Stolper believes the EUR is unlikely to strengthen materially as long as this situation persists especially as the potential for the ‘fiscal risk premium’ to rise on the back of daily headlines that are dominated by disagreement and dispute remains. In an effort to clarify his thinking, Stolper identifies eight key issues that will determine the outlook for the Euro. Most of them relate to the Euro area crisis. The most interesting ones are possibly the timing of a recovery in the periphery, the ability of France and Germany to develop a common vision for further integration, and the evolution of fiscal policies in major economies outside the Euro area. He concludes that the risks in the near term remain substantial.

Nearly full employment in all the cited developed economies except the US shows that the deflationary environment of the recent months is only temporary. Deflation is rather an effect of the recent strong fall in commodity prices. No wonder that the Fed is still reluctant to ease conditions; they saw the opposite temporary commodity price movements last year. We do neither expect a global inflation nor a deflation scenario but a balance sheet recession in many countries but still an increase of wages and therefore a very slow global growth in both developed and developing countries and continuing disinflation (see chart of Ashraf Alaidi to the left). CPIs will look soon similar for all developed countries, with the consequence that the currencies of the most secure and effective countries (measured in terms of trade balance and current accounts) will appreciate. These are for us e.g. Japan, Switzerland, Singapore and partially Sweden and Norway. The overvalued currencies with weaker trade balances like the Kiwi and Aussie must depreciate.

While virtually every European risk indicator is now being gamed to underreport the true nature of the capital flow panic on the continent, one remains steadfast: Swiss nominal yields, which as we pointed out a month ago, have become the only true indicator of liquidity stress. And as noted this morning, Swiss 2 Year bond just hit a record nominal -0.37% (which coupled with record low yields in German yields explains everything about where money is sprinting to in Europe, and just how much "confidence" in the system is left). And while the SNB continues to suffer massive losses on its EURCHF peg, the reality is that it continues to offer a free put to all those who wish to move away from EUR exposure and into the relative safety of the CHF (the risk of cantonal disintegration is still relatively low). Which is why the only recourse authorities have in dealing with the now record flight to Swiss safety is brute force. Sure enough, as Reuters reports, clients of the two largest Swiss banks: Credit Suisse and UBS was raided in two independent, but likely linked, operations in Germany and France, respectively, in a show of force that moves beyond mere tax-evasion and has a goal of scaring anyone who still thinks of keeping their money in the relative safety of Geneva and Zurich bank vaults.

• Euro zone fragmenting faster than EU can act (Reuters)
• Wall Streeters Lose $2 Billion in 401(k) Bet on Own Firms (Bloomberg)
• Eurozone crisis will last for 20 years (FT)
• Chuckie Evans: "Please suh, can I have some moah" (Reuters)
• Quote stuffing and book sales: Amazon ‘robo-pricing’ sparks fears (FT)
• Situation in Egypt getting worse by the minute: Egypt parliament set to meet, defying army (Reuters)
• Chinese goalseek-o-tron speaks: China’s inflation eased to a 29-month low (Bloomberg)
• A contrarian view: "Barclays and the BoE have probably saved the financial system" (FT)
• Flawed analysis: Dealers Declining Bernanke Twist Invitation (BBG) - Actually as shown here, ST Bond holdings have soared as dealers buy what Fed sells: more here
• Obama team targets Romney over taxes, Republicans cry foul (Reuters)
• And all shall be well: Brussels to act over Libor scandal (FT)
• Bank of England's Tucker to testify on rate rigging row (Reuters)

What's in the "Print" today? Not these issues.

A generation of market participants has grown up knowing only the era of central bankers and the 'Great Moderation' of (most of) the last two decades elevated their status significantly. While central bankers are generally very well aware of the limits of their own power, financial markets seem inclined to overstress the direct scope of monetary policy in the real world.

If markets fall, investors need only to run to central bankers, and Ben Bernanke and his ilk will put on a sticking plaster and offer a liquidity lollipop to the investment community for being such brave little soldiers in the face of adversity

Monetary policy impacts the real economy because it is transmitted to the real economy through the money transmission mechanism. This has become particularly important in the current environment, where, as UBS' Paul Donovan notes, some aspects of that transmission mechanism have become damaged in some economies. Simplifying the monetary transmission mechanism into four very broad categories: the cost of capital; the willingness to lend; the willingness to save; and the foreign exchange rate; UBS finds strains in each that negate some or all of a central bank's stimulus efforts. In the current climate, it may well be that the state of the monetary transmission mechanism is even more important than monetary policy decisions themselves. Some monetary policy makers may be at the limits of their influence.

For the last several days, I’ve been weaving between northern Italy and Switzerland checking out great places to bank, new places to store gold, and taking in these gorgeous lake views. Every single time I’ve crossed the border, I’ve been met by rather snarly police on both sides; they’re stopping cars, turning people’s trunks inside out, and causing major traffic problems. A friend of mine who came up on the train from Florence to meet me for lunch in Lugano said he was stopped at the border for nearly an hour as thuggish customs agents randomly questioned train passengers and demanded to see their IDs. So much for Europe’s 26-country ‘borderless area.’ Based on Europe’s 1985 Schengen Treaty and 1997 Amsterdam Treaty, you’re supposed to be able to drive from Tallinn, Estonia to Lisbon, Portgual without so much as slowing down at the border. This is not dissimilar from driving between states in the US or provinces in Canada. Yet as Europe descends into greater financial and social chaos, leaders are starting to ignore these agreements which guarantee freedom of movement across the continent.

• Beggars can't be choosers after all: Greece Drops Demand to Ease Bailout Terms (FT)
• It took journalists 4 years to get that under ZIRP all banks have to be hedge funds: US Banks Taking Risks in Search of Yield (FT)
• Made-In-London Scandals Risk City Reputation As Money Center (Bloomberg)
• Merkel Approval Rises to Highest Since 2009 After EU Summit (Bloomberg)
• Judge orders JPMorgan to explain withholding emails (Reuters)
• U.S. hiring seen stuck in low gear in June (Reuters)
• Germans Urged to Block Merkel on Integration (WSJ)
• Crony Capitalism Rules: Countrywide used VIP program to sway Congress (Reuters)
• Barclays’ US Deal Rewrites Libor Process (FT)
• Cyprus Juggles EU and Russian Support (FT)
• Delay Seen (Again) For New Rules on Accounting (WSJ)
• Lagarde Says IMF to Cut Growth Outlook as Global Economy Weakens (Bloomberg)

Let’s face it – Europe is a cool place. In addition to being cool, Europe is also without a doubt the most creative and imaginative place outside of Middle Earth. Its ability to  consistently baffle itself certainly warrants valuable space in IceCap’s global market outlooks. Financially speaking, Europe is broke - it no longer works. Figuratively speaking, Europe has entered its golden age. Unworkable solutions dreamt by an unworkable political system is consuming all real and electronic ink known to mankind. A day doesn’t go bye where local newspapers are not bursting with news on Greece, Spain and their Euro-cousins. This sudden love-in with Europe has surely removed America from the global spotlight. But, be patient as this will change later during the year. To demonstrate the absurdity of this place called Europe, one has to understand nothing else except the legalities behind Europe’s rules for selling cabbage to each other.

Despite the July 4th mid-week holiday, the coming week will be packed with major economic updates. Goldman Sachs summarizes what to look for in the next 5 days.