Is the SNB going to start intervening again in the Swiss Franc?


The Swiss National Bank has been monitoring the global situation with regards to currency markets very closely recently, and is now ready to intervene once again following the sudden removal of the 1.20 floor on the EURCHF pair on January 15 this year which created tremendous volatility and resulted in at best, negative client balances, and at worst, the insolvency of previously long-standing and well-capitalized firms.

Switzerland may have a square, grey suited image as a business environment among global counterparts, however the nation has never in post-industrial revolution history exposed itself to any outside factor which could even dilute its own domestic situation, let alone harm it.When looking at the events of Thursday January 15, it could be that Switzerland is safeguarding its own interests in a time when global, and in particular European, economies are faltering in numbers, leading, along with levels of unrest, to a climate very similar to that of the 1930s in central Europe.

In a report today by Reuters, the Swiss National Bank has confirmed that if it had maintained the currency peg, the cost would have been 100 billion Swiss francs (73 billion pounds) to defend this month alone.

“Giving up the cap means a tightening of monetary policy. We accept this, but only up to a point. We are fundamentally prepared to intervene in the foreign exchange market,” Swiss National Bank Vice President Jean-Pierre Danthine explained to Swiss national daily TagesAnzeiger in an interview.

Mr. Danthine stated that it would take some time for the foreign exchange markets to balance out, but declined to give exact levels, saying the central bank was not only looking at the exchange rate with the euro but also with the dollar.

Asked about a new currency strategy, Mr. Danthine said Denmark’s policy of pegging the krone to the euro would not be suitable for Switzerland, but that Singapore’s system, which allows the Singapore dollar to rise or fall against the currencies of its main trading partners within an undisclosed trading band, “deserved closer examination”. He also gave Sweden and Norway as examples of small, open economies that have fared well with a flexible exchange rate.

Mr. Danthine defended the SNB’s decision to scrap its cap on the franc, saying the risks of the policy to the economy had begun to outweigh the benefits.

“Theoretically, the balance sheet can grow endlessly,” Danthine said. “However, in this situation the SNB could – in an extreme case – be forced to bring more francs to the market than monetarily responsible.”

Danthine also cited the risk of losses on the bank’s forex reserves as a reason for abandoning the cap. Bearing in mind that the Swiss National Bank is unlike other central banks in that it is not only the currency issuer of a completely independent nation, but is also 45% privately owned. Huge losses could wipe out the SNB’s annual payout made to its biggest shareholders, Switzerland’s 26 cantons, or states, and to the federal government, he said.

Just a matter of days ago, the European Court of Justice provided an interim ruling that was intended to favor the European Central Bank in its attempt to save the ever-ailing Eurozone.

The European Court of Justice ruled that the European Central Bank’s government bond buying program is compatible with EU treaties, which came about as a result of a request by Germany’s Bundesbank to rule on the Outright Monetary Transactions program created in 2012; a pledge to buy unlimited quantities of bonds if a country was struggling to borrow in the financial markets and had signed up to certain reforms.

Following this, with Greece sinking under the burden of national debt which was initially attributed to the ECB having been buying bonds in the open markets as a way of reducing the interest rate that Greece must pay on market borrowings, of which the future is now highly uncertain as the quantitative easing policy issued by the European Central Bank President Mario Draghi was far in excess of what had originally been estimated, with the European Central Bank now having to write a check for buying assets worth 60 billion euros (USD67 Billion) per month from March 2015 through to September 2016.

The precarious fiscal practice began when the ECB began taking Greek bonds as collateral against loans to entities such as the already struggling Greek banks. In turn, this was a precarious position, as if there is a devaluation of the bonds, the entire lot will all go bust immediately, leaving the ECB with that collateral which is now worth so much less than the loan against it that it will (near, maybe,) wipe out the ECB’s capital.

The figures are rather in dispute, but there are indications that the ECB is exposed to €150-€190 billion of Greek debt, out of the €340 billion total, however now Greece has elected its Syriza socialist party which is vehemently opposed to any austerity, or indeed responsibility for repaying the vast debts, therefore sensible Switzerland is busily engaged in the process of pulling up its drawbridge in order not to involve itself in the potential eurozone disaster.

Yesterday, the equivalent of £6 billion was withdrawn from Greek banks following the elections, and the possibility of a bank run is becoming increasingly likely.

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Is the SNB going to start intervening again in the Swiss Franc?

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