The Swiss just abandoned their Euro ceiling

[Foucaulf]

Big news today in international finance:

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The story is that, since the Euro debt crisis kicked off in 2011, Europeans have flooded to buy Swiss francs as a stabler asset. Letting it rise without intervention would kill Swiss exports to the EU, which compose a significant portion of its economy. The Swiss National Bank, then, decided to buy as many Euros with Swiss Francs as it takes to not let the exchange rate get too high for the Franc.

The consequence: the SNB has an asset sheet with as many Euros as national GDP. This leaves them exposed to sudden depreciations in the Euro, and this was the cited reason for the move.

CHF/EUR exchange rate is still at a bit above parity, and investors are pissed. The Swiss stock exchange is down 8% today, and there's going to be panic for financial products denominated in Swiss Francs (like mortgages in Eastern Europe). What the Swiss Bank will try to do now is to lower interest rates to penalize holding of Swiss Francs. That won't stop others from blaming the Bank for destroying its credibility, and causing even more uncertainty in the Eurozone.

[Foucaulf]

Here's another way to describe what just happened.

There are two stories on why the SNB dropped the ceiling so suddenly. The Bank's official position is that it does expect a weaker Euro in the future and want to stop accumulating it, but especially made this surprise announcement because dragging it out would make it worse. Dragging out the commitment to the debt ceiling would provide an incentive to hedge more against the Euro, which will create more instability when the commitment finally pops. By immediately ending one policy and starting another (negative interest rates on Franc reserves), the Bank want to get to the new normal as quickly as possible.

That's not the story the bankers are telling themselves. They're interpreting this as the Swiss Bank getting insider information that the ECB will launch a big QE program very soon now that the legal barriers are being resolved. The Bank, therefore, needs to immediately stop amassing more Euros and sell them off too. (This is, incidentally, a more "Austrian" interpretation.) And, if this is the story that bankers believe, the decision will drive instability in Europe over the short run in the same direction as dragging it out would have been.

[Potus]

This thread helps to illustrate the Atlas well. The threads on taxing religious institutions has multiple pages, but the breaking, incredibly important news about the SNB has zero replies from anyone but the OP.

[jaichind]

This act undermines the credibility of central bankers as a whole.  it actually makes the Central Bank of Japan's job of convincing the market that it will defeat deflation at all costs that much weaker.

[Sprouts Farmers Market ✘]

Well, I almost certainly believe it's the first reason as there is no reason to be optimistic about the Euro. However, that doesn't mean QE is mutually exclusive. I'd still give that just shy of 50% chance of occurring frankly because I don't think it would work and people across the continent (not just Germans) don't seem very receptive to it. It could happen if they are that desperate, but I'd imagine this is about the weakness of the currency going forward since the monetary union really doesn't have viable a solution.

[Mehmentum]

So what impact on the European economy will this have.  I imagine this will have an impact on Swiss tourism due to the higher prices in Switzerland, but does this destabilize the Euro in general?

[solarstorm]

Numerous German communities are left with foreign currency loans in the billions - particularly in North Rhine-Westphalia - because the treasurers have gambled their money away speculating. Due to the franc shock, the repayment increases the costs dramatically. A loss of hundreds of millions is imminent.

29 cities and counties are left with foreign currency loans in the amount of 1.9 billion euro at the end of 2013. The already highly indebted NRW municipalities are facing a renewed financial disaster. Particularly striking the situation is in Essen (367 million euro), Bochum (EUR 180 million euro) and Münster (118 million euro).

Most credit exposures arose from the time of the new millennium. At that time franc loans were considered especially popular among treasurers as the Swiss interest rate level was fairly lower than in Germany. The interest rate advantage was sometimes supposed to be more than one percentage point. The exchange rate between the euro and the Swiss franc was fairly stable at that time.


Meanwhile, the franc shock has apparently claimed his biggest victim: The US hedge fund Everest Capital Global with $830 million in assets went bankrupt after the Swiss National Bank scrapped its three-year-old cap on the franc against the euro. According to the "Wall Street Journal" the speculative fund had laid large-scale bets on a devaluation of the franc - exactly the opposite happened.

[ingemann]

So what impact on the European economy will this have.  I imagine this will have an impact on Swiss tourism due to the higher prices in Switzerland, but does this destabilize the Euro in general?

It impowerish some people (as example many in Poland have taken loans in Swiss Francs, because the strong Polish Zloty versus the Euro made this a good deal, it's no more) who have borrowed money in Swiss Francs, but for the Euro it means very little, yes it makes the Euro slightly weaker, but it's really by a small margin, and honestly the Euro is too strong right now. This would have been a problem or a good thing if Switzerland had been 10 times bigger.

[True Federalist (진정한 연방 주의자)]

Meanwhile, the franc shock has apparently claimed his biggest victim: The US hedge fund Everest Capital Global with $830 million in assets went bankrupt after the Swiss National Bank scrapped its three-year-old cap on the franc against the euro. According to the "Wall Street Journal" the speculative fund had laid large-scale bets on a devaluation of the franc - exactly the opposite happened.

I can understand why some would think the cap would be maintained, but that anyone would think it would be lowered?

[Sprouts Farmers Market ✘]

Meanwhile, the franc shock has apparently claimed his biggest victim: The US hedge fund Everest Capital Global with $830 million in assets went bankrupt after the Swiss National Bank scrapped its three-year-old cap on the franc against the euro. According to the "Wall Street Journal" the speculative fund had laid large-scale bets on a devaluation of the franc - exactly the opposite happened.

I can understand why some would think the cap would be maintained, but that anyone would think it would be lowered?

I was going post this yesterday because it seems like such a dumb idea that I would never have expected to happensure anymore. Could it be an even more extreme form of currency manipulation than China to make its banks assets worth more in francs if they were effectively all Euro? Or more simplisticly increase exports? I don't know why a country like Switzerland would take either of those views (but then again, the initial peg was surprising).

[ingemann]

Meanwhile, the franc shock has apparently claimed his biggest victim: The US hedge fund Everest Capital Global with $830 million in assets went bankrupt after the Swiss National Bank scrapped its three-year-old cap on the franc against the euro. According to the "Wall Street Journal" the speculative fund had laid large-scale bets on a devaluation of the franc - exactly the opposite happened.

I can understand why some would think the cap would be maintained, but that anyone would think it would be lowered?

I was going post this yesterday because it seems like such a dumb idea that I would never have expected to happensure anymore. Could it be an even more extreme form of currency manipulation than China to make its banks assets worth more in francs if they were effectively all Euro? Or more simplisticly increase exports? I don't know why a country like Switzerland would take either of those views (but then again, the initial peg was surprising).

As I understand it, it make some sense if the ceiling had been kept, the Dollar are rising against the Euro, with Swiss Franc hitting the ceiling, this would have meant that Swiss Franc fell compared to the Dollar, if the Swiss had kept the ceiling. Economist here can tell me, if I'm completely wrong.

[AggregateDemand]

Currency pegs are an unsustainable illusion. More news at 6.

*yawn*

What did people expect? If China can't peg its way to riches, Switzerland wasn't going to pull it off.

And just think about how screwed they'd be, if they had been ridiculous enough to pass guaranteed minimum income prior to this announcement. The US suffered because of onerous payroll taxes. Multiply by 1000% the socioeconomic impact of hollowing-out of the US manufacturing sector, and you'd have some vague conception of what a guaranteed minimum income would do during rampant franc appreciation.

[○∙◄☻¥tπ[╪AV┼cVê└]

This act undermines the credibility of central bankers as a whole.  it actually makes the Central Bank of Japan's job of convincing the market that it will defeat deflation at all costs that much weaker.

Keynesian economics is the obvious choice to defeat deflation. Why do anything else?