Swiss move to make its safe-haven less attractive


Euro v Swiss Franc

Last Updated at 22 Sep 2014, 20:30 ET *Chart shows local time EUR:CHF intraday chart
€1 buys change %

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

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  • rate this

    Comment number 21.

    Can we call it "The flight to gold (And the Swiss Franc)"? And when these collapse, is that yet more capital death, such as the banx seem to have been achieving so efficiently of late? Perhaps the last thrashes of the tail of this oh so ailing beast that is our global economy.

  • rate this

    Comment number 20.

    Hi JfH,
    I'm beginning to wonder if you could have bought a house for a couple of grand a few decades ago, and are now so bitter that you didn't. You seem to advocate bankrupting everybody in your path.
    The solution to this crisis is for the creditors to employ debtors for productive work.
    Bankrupting hard working people is not the answer you prescribe.

  • rate this

    Comment number 19.

    A possible unintended consequence of this could be the revival of the swiss franc carry trade.

  • rate this

    Comment number 18.

    The problem is that everybody wants to save their economy by boosting exports and to inflate away their debts - they ALL want to devaluate their currencies.
    If one starts, the others will do the same, probably resulting in stagflation and maybe even full blown trade wars.

    So the UK would not to get away with it

    What we need are structural changes to our financial system

  • rate this

    Comment number 17.

    @ 12. nautonier - Its the job of the swiss government to look out for its people. Unfortunately, by devaluing their currency, and robbing the swiss people of their purchasing power, they are not doing that job. Not much point working, producing goods for export, only to have your wages and savings devalued by inflation.

  • rate this

    Comment number 16.

    It's possible to buy Gold as metal, as Sovereigns if you're a smaller investor (they don't even attract any tax) or Gold Bars.

    That said, it's really sad that if you worked hard and refrained from wasting your money, you have to move your money out of the Pound in order to avoid having its value taken away by inflation to support the careless, the wasteful and the bankers

  • rate this

    Comment number 15.

    Re: 'Meanwhile the Swiss stock market closed more than 4%.'

    UP or DOWN? Do tell.

  • rate this

    Comment number 14.

    8. stennylfc

    Currency Wars...

    ONLY benefit bankers - never anyone else. They are the best way possible for casino bankers to acquire everyone else's assets!


    The Bankers destroyed the World now they want to do so again!

  • rate this

    Comment number 13.

    What the Swiss are trying to do (which will fail) is just what the UK has to do. Crash Sterling to get the debt deflated, or rather something similar.

    The consequences of the Swiss choice will hurt prudent Swiss - just as a devalued pound hurts prudent British.

    However the prudential World will dominate again as it always does in a global depression - the froth will evaporate (i.e house prices)

  • rate this

    Comment number 12.

    1.Arthur Daley
    2 Hours ago
    Good to see a government doing something

    Yeah - 'looking after No 1' - i.e. the Swiss.

  • rate this

    Comment number 11.

    @ 8. stennylfc - What happens is the clause which allows etf's to be paid out in paper is invoked, and by then the paper will be useful only as firelighters.

    But of course, so many people think gold and silver are in a bubble already, they don't even have etf's, only paper.

    Gaddafi isn't fleeing tripoli clutching bundles of etf's .

  • rate this

    Comment number 10.

    Two posts in a day, glad to see your back Stephanie at the most volatile time of year for economics.

    Quick History
    Wall Street Crash (Oct 29)
    Stock Market crash - Black Monday (Oct 87)
    Sterling Crisis - Black Wednesday (Sep 92)
    LTCM (Sep 98)
    Lehmans (Sep 08)

    I don't know what it is about Sep/Oct, but I doubt the world will be the same come November.

  • rate this

    Comment number 9.

    Swiss have weakened the Sw. Franc to assist their exports as the price of their watches and chocs etc would be too high to sell with a strong Swiss France & in a part global recession & even the Swiss are concerned about increasing population level, immigration & potential for higher unemployment. Also, Swiss nervous about being asked to contribute to help bail out Eurozone when the Euro crashes.

  • rate this

    Comment number 8.

    With the currency safe haven of the wealthy elite removed their money will just go into Gold & Silver as this back door QE means more inflation.

    As we get closer to a systemic collapse what happens when all the people who bought Gold & Silver ETF's realise the banks do not have the physical metals to back up their options.

    The coming currency wars are one more nail in the coffin of capitalism

  • rate this

    Comment number 7.

    In times of currency wars, the only winners are armed with gold and silver.

  • rate this

    Comment number 6.

    Stephanie, I see you are still trying to make sense of the present by looking at what went on before. Things don't work that way I am afraid.
    For every person thinking that way there are ten others trying to get an edge. The net result is unpredictability. Full stop.

  • rate this

    Comment number 5.

    I remember when Harold Wilson had trouble with the "Gnomes of Zürich" !

  • rate this

    Comment number 4.

    3 Ricardo

    Markets are about exploitation. All markets need regulation. The Swiss goverment is regulating. If other government showed the same determination it would help.

    These are not savers they are this -,1518,781590,00.html

    Please do not sanctify them as savers.,1518,783654,00.html

  • rate this

    Comment number 3.

    The Euro, the Pound and the Dollar are linked to economies whose financial systems have serious structural problems with no political will to solve them

    Meanwhile central banks keep trying to "boost the economy" with low interest rates & QE while inflation soars, effectivelly transfering money from savers to debtors

    Unsurprisingly savers try to protect their savings by exiting those currencies

  • rate this

    Comment number 2.

    When you say there are not many winners you are referring to countries because I dont see too many hard luck stories about bankers and speculators. Spending sprees in Switzerland do not chime easily with five hundred years of democracy, peace and the cuckoo clock.


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