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.