Op Ed: Did Switzerland’s black swan intentionally land in murky waters?


There is absolutely no doubt that the majority of senior executives within the world’s array of forex companies, which differ tremendously in their business models from eachother and offer a whole range of services to various private and institutional clients around the world, are among the most urbane and dynamic in the entire global business spectrum.

So rapid has the development, innovation and subsequent obsolescence become in the FX business that very quick corporate decisions have been needed on an ongoing basis since the dawn of electronic trading, often preceded by hundreds of man hours concentrating on examining what may happen next.

Nothing, however, could possibly have prepared the FX industry for Thursday’s landmark move by the Swiss National Bank which abandoned the 1.20 floor on the EUR/CHF pair, leaving several companies and traders exposed to tremendous losses, with a small proportion being exposed beyond rectification.

There have been isolated, accidental cases of activity resulting in substantial losses, such as algorithmic failure, or misappropriation, but this is a polar opposite of both scenarios, in that it was never anticipated by any firm, and that it was imposed by a national central bank carte blanche on an unsuspecting global electronic trading industry.

The question is, why would sensible-shoes Switzerland make such a dramatic move?

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.

During the second world war, Switzerland, a small country with only approximately 4 million citizens in 1940, yet located in central Europe, surrounded by nations at war with eachother and bordering countries controlled by the Allies on one side and the Axis forces on the other, remained totally neutral, and was never invaded.

Sixty years later, the country stood tall against any pressure to join the European Union, retaining its independence in its entirety, and secures its borders with remarkable zeal.

The response to Switzerland’s adamant wish to remain neutral and independent is always met with politeness all round, and its traditional, non-technological, almost cottage industries tick along (if you’ll excuse the pun) as they have done for centuries: the manufacturing of precision timepieces, and of course vault-like, ultra-secure banking institutions.

When looking at the events of Thursday, 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.

Just a matter of days ago, the European Court of Justice provided an interim ruling that favors 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.

This became a very dangerous fiscal practice 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.

If therefore the bond buying program is legal, Greece may drop out of the European Union, signaling the end of what the European Commission would like to view as a federal European set of states, with neutral Switzerland nestling among it, independent and prosperous, and without the civil unrest, financial woes and demographic timebombs affecting other nearby nations which are well and truly signed up to the EU.

As I mentioned last week in a TV interview, Europe’s business ecosystem is radically different to that of the United States, insofar as that the European Union is made up of a series of states which are completely misaligned with eachother, have totally different economies, different business environments, widely differing levels of technology and fiscal strength. For example, Britain hosts the world’s largest institutional FX trading center, with top of the range technology, market infrastructure, connectivity and liquidity provision and prudent risk management.

Despite that, none of its order flow is European – most of it is from the Far East, Middle East, Russia and North America, and the majority of British FX dealers and large banks have vast subsidiaries in Hong Kong and Singapore.Conversely, mainland Europe is not a technologically advanced region, does not have a developed electronic financial sector, and ranges from nations like Germany which is reliant on a manufacturing industry to France which has very serious demographic issues and is largely indebted, to Belgium whose mainstay is government sector employees, through to Spain, Italy, Portugal and Greece which are all largely agrarian and have spiraling youth unemployment and relative poverty.

Moving east, there are new entrants to the European Union where the GDP is so tremendously different to that of Western Europe that it is hard to see how this can be aligned, yet some nations such as Latvia are expected to share the same currency as Ireland or France, with a tenth of the average monthly earnings.

Comparatively, there are no regions within the United States which are more or less technologically advanced than others, and the domestic business ecosystem is totally aligned and self sufficient. It is entirely possible to provide a trading desk in Chicago or New York with computer technology developed in Houston, risk management tools from northern Michigan, connectivity from Toronto just north of the border, and venture capital funding for new developments from San Francisco. There is no need for one, sophisticated and demographically sustainable part of the United States to write blank checks every month for another part of the country which is undeveloped and relies on bailouts.

When considering the potential unsustainability of the entire union of EU member states, many of which are reliant on bailouts from Germany and Britain which are nations which are far from in fine condition financially despite their greater productivity, Switzerland may be pulling up the drawbridge by acting in the manner which was witnessed on Thursday last week, in an attempt to safeguard its position should the European Union fragment and debts begin to be called up, with those owing the debts very unlikely to ever be able to resolve them.

If that occurs, and there are nations which have to go it alone and reintroduce their own sovereign currency, it would mean starting again from scratch, and in the case of Greece, and other similar nations, it is unlikely that a sudden drive toward developing modern technology and becoming an industrial tour de force would come about to generate revenue, in which case debt would be written down, further impoverishing nations which signed themselves up to the EU.

The damage done by Switzerland’s unexpected decision ranges from very minimal, to the declaration of insolvency by some well established firms, to entire hedge funds being wiped out in one day.

It is likely that the aftermath of this will result in regulatory authorities around the world beginning to reach for their metaphorical microscopes in order to analyze the risk management procedure of FX firms, and how they were exposed to such a move which effectively pulled the floor out from underneath them.

It is indeed likely also that this event will change the face of the entire FX industry henceforth. Companies which remain strong may look to purchase those who fell foul, and a new approach to risk may be taken.

One thing is for sure, that being the Swiss Franc’s continued reliability. Indeed, although the Swiss National Bank instigated this floor drop, it reflects more on the Euro, its issuer, and the regions whose national currency it is rather than reflecting on Switzerland.

The question is, with the demographic and civil difficulties which are now occurring across many European nations, combined with fiscal difficulties and an economy which keeps flagging, the southern nations in constant need of bailouts whilst modernity evades them and the northern part still recovering from the 2008 financial crisis which was brought about by banks over exposing themselves to retail debt, when the inevitable detritus has to be picked up should the EU come to an end, will Switzerland, as ever, hold its head high and retain its centuries-old reputation for financial strength?

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Op Ed: Did Switzerland's black swan intentionally land in murky waters?

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