Swiss move to make its safe-haven less attractive


Euro v Swiss Franc

Last Updated at 18 Sep 2014, 14:56 ET *Chart shows local time EUR:CHF intraday chart
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Risk-free? No thank you.

"Lord, make us a safe haven, but not too safe." That could be Switzerland's new national anthem.

The likes of Greece and Italy might be desperately trying to win the confidence of international investors, but today the Swiss central bank promised to spend an unlimited amount of money turning investors off.

Such are the strange - and yes, scary - times in which we live.

The Swiss have been trying to become less popular in the markets for a while now, ever since global investors decided that risk was "off" and safe havens were in. Again and again, the authorities have warned currency traders that the Swiss franc was not a one way bet. All to no avail.

Buying foreign currency to keep a lid on the Swiss franc last year cost the Swiss National Bank (SNB) nearly 20bn Swiss francs ($23.2bn, 16.6bn euros, £14.3bn) - and nearly cost its chairman, Philipp Hildebrand, his job.

Getting serious

The SNB has lost another 10bn Swiss francs since the start of 2011. Since the start of 2010 the currency has appreciated by 31%, in real terms

But now Mr Hildebrand has decided to get serious. Here's the key paragraph from the statement that the Bank put out first thing this morning.

I'm quoting it at length, because it's unlike any press release you're likely to have seen from a major central bank: "The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.

The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF (Swiss franc) exchange rate below the minimum rate of CHF1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities. "

New money

Central banks don't usually use phrases like "unlimited" when it comes to creating money. And let's be clear - that is what this statement means. It says that, if necessary, the central bank will create an unlimited amount of Swiss national currency to buy foreign exchange and thereby push down the value of the franc.

If tested - and it surely will be - this could be a recipe for creating hundreds of billions of Swiss francs.

Mr Hildebrand will be making a statement on national television tonight defending his actions, as well he might. But the clear message of the statement is that the central bank doesn't care about the inflationary implications of this intervention.

Or at least, it is not nearly as worried about that as it is about the deflationary implications of the high franc, which is throttling domestic industry.

The price of consumer goods is currently falling, and inflation overall is hovering around zero.

Short fix?

Will it work? Maybe, for a while. The franc fell by nearly 10% against the euro in a few minutes this morning, coming back slightly over the afternoon to close at 1.20 Swiss francs against the Euro.

Meanwhile the Swiss stock market closed more than 4%.

Apparently, the word "unlimited" is still worth something, even in a multi-trillion dollar global currency market.

But the record of currency pegs, and intervention in the markets to support them, is mixed at best. Indeed, it was precisely because European countries found it so hard to fix their exchange rates that the euro ever got off the ground.

The standard line from the academic literature is that central bank intervention in foreign exchange works only when it's in line with the fundamentals - and even then, only when lots of central banks work together.

Those conditions don't necessarily apply here.

In terms of the real economy, the Swiss currency certainly looks over-valued.


But investors aren't looking at the fundamentals at the moment. They're not even looking for a positive return.

They're just looking for the least wealth-destroying option available.

Eventually, that will change: investors will stop looking for safe havens, and the Swiss central bank will find its job has become a lot easier.

But in the meantime, the Swiss authorities have declared war on a wall of cash which is a lot bigger than they are, and doesn't have a lot of other places to go.

Remember I said the other lesson of history was that interventions worked best when central banks worked together? There's little sign of that today.

Quite the opposite.

In fact, what we saw today was the next round of a global currency war.

There, the big lesson of history is that they don't produce many winners.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

So it's goodbye from me

After 11 years at the BBC, I'm leaving for a new role in the City.

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  • rate this

    Comment number 61.

    And such QE will not have the same inflationary effect here because...

  • rate this

    Comment number 60.

    Hi Stanlic,
    It is not the hard working people who should be bankrupted. Many paid a high price in order to live with a roof over their heads.
    A reset to zero approach will allow the perpetrators to get away scot free.
    A good investor cares not about the monetary value, only the ownership of what is left.
    Please think about it.

  • rate this

    Comment number 59.

    And there was me thinking a strong currency resulted in an external trade deficit which weakened it and that the influx of hot money would make stocks elsewhere v. cheap.
    Another Central Banker who talks rubbish?
    PS Re the post talking of disappointing growth: internatioanl finace capital doesn't find it disappointing at all. It means wages can be driven down even further, and profits driven up.

  • rate this

    Comment number 58.

    I think the Beeb may be regretting trailing the 50% tax rate story quite so much. There are two and a half thousand posts on that thread (and increasing) and most of them, from what I have seen, are against scrapping it.

    What is the all time record for posts? I thought it was around a 1000 before the Blogs started getting closed within twenty-four to forty-eight hours.

  • rate this

    Comment number 57.

    Comparisons being made to when the UK government vainly tried to stay in the ERM by *buying* GBP, are surely wrong-headed.

    The Swiss today are *selling* francs (as mentioned by tFoth).
    As they are currently so overvalued, long term they can't go wrong. Just keep creating more francs till the price falls. Sell now for a high price, buy back later for a low price.

    Easy peasy - Swiss cheesey?

  • rate this

    Comment number 56.

    Swiss currency surge has turned some Swiss industrialists hot. There's criticism of Swiss National Bank for not doing more. Such calls have put the SNB under immense pressure. But in spite of its good reputation, the SNB has been ineffective in tackling the challenge. Mr Hildebrand, Head SNB has been taking heat. SNB’s actions have left country saddled holding vast amts foreign currencies.

  • rate this

    Comment number 55.

    re #42 I am not sure that the £:SFr currency re-valuation is due to manufacturing or exports or anything like that. We have been a petro-economy which the Swiss haven't. Our £ should be worth a lot more against the SFr.

    It is continual inflation for fifty years, among other things, that has done the damage to the £.

  • rate this

    Comment number 54.

    To be sure, strong franc has helped many companies, by softening impact of raw materials prices – & economic growth has proved surprisingly resilient. Real gross domestic product grew by more than 2%last year; unemployment is currently a mere 2.8%...Economists fear booming franc will be felt in second half; some fear recession may be inevitable.

  • rate this

    Comment number 53.

    re #50
    People are not stealing the Swiss Francs. They are buying them. They are being bought by people with enough cash wealth to be constantly seeking a place to invest. Shares look like they will go down, house prices may be following, interest rates are lousy or non-existent in the major economies so currency is another haven like gold or futures or ...

  • rate this

    Comment number 52.

    10 stennylfc: "Two posts in a day, glad to see your back Stephanie" Where is the picture of Stephanie's back please?!

    Seriously: I am glad to see you're back Stephanie & agree the Swiss are hell-bent on lowering the value of their currency. However, it seems that if history is repeated, this move may only provoke a 'currency war', which in the long run will bring us back to the starting-post.

  • rate this

    Comment number 51.

    Falling dollar + suffering Euro = abandon same, invest in solid francs. Franc has climbed 20% against euro & 30% against dollar.
    Good news? No, nightmare for businesses reliant on foreign currency earnings. Even prospect for tourism is slim. When the franc started to climb, business tried to boost productivity, streamline their processes. Still, profit margins suffered; now pain is bone deep.

  • rate this

    Comment number 50.

    You mention what you believe to be the rules of economics often these days and how they no longer apply. The investors, investing the money they stole from retirement accounts, want to invest in anything but national economies and jobs. the Swiss are smart to limit the involvement of jackals. these are different times with so many financial criminals looking for new places to steal.

  • rate this

    Comment number 49.

    I suppose it would be too much to expect teh SNB to use this as an opportunity to enrich their citizens?

    Why couldn't they incrementally issue Bonds to their citzenry, make them redeemable at some future date to limited inflationary impact, and see when the speculators lose their nerve.

  • rate this

    Comment number 48.

    Didn't all the bankers flee to Switzerland because we are such a rubbish country? Does this mean some will be coming back and if so how do we stop them?

  • rate this

    Comment number 47.

    #66: Bob, or for the Greeks to borrow from the Swiss, virtually interest-free, convert it to Euros and pay off all their debts. Simples!

  • rate this

    Comment number 46.

    Why doesn't the Swiss national bank buy Greek bonds instead of foreign currency, they would become a riskier place to hide your money (so making it slightly less attractive) and it would reduce the price of Greek debt.

  • rate this

    Comment number 45.

    A modified Gold Standard appears likelier by the day.

  • rate this

    Comment number 44.

    Why not print some swiss francs and then use them to buy Greek, Irish, Portugese, Italian and Spanish government bonds.

    Problem solved!

  • rate this

    Comment number 43.

    Mr Hildebrand may playing a subtle game. He knows you can't bet against the currency markets forever. But, if the markets come to believe that he is prepared to trash his country's economy to preserve the exchange rate ("do as I say or the puppy gets it"), then that would certainly stop them viewing Switzerland as a safe haven. It's called a Doomsday weapon.

  • rate this

    Comment number 42.

    Countries that export on quality (e.g. Switzerland, Germany) will often seem to have overvalued currencies compared to those who export on price (e.g. us). Why is this?. Because there's such strong demand for their goods that price has v. little effect on demand, and the Swiss- and Germans become richer and richer. We managed to do it once.
    In 1960 £1= 12 CHF. Today £1= 1.4CHF. Nuff said.


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