Wednesday, October 12, 2011


The SNB took a further step towards disaster this week with the decision to maintain the peg with the EUR.

The CHF is a currency of refuge in times of crisis. It is the currency of a country which is not insolvent, has properly funded social liabilities and the lowest level of debt in the OECD.  Hence in a world where all other countries are printing money and debasing their money the CHF should be even more attractive.

For the Swiss Citizen this as all good, the imports are cheap and purchasing power abroad is very strong. The strong currency poses problems for multinationals seeing their profits, and management bonuses in CHF fall, for exporters whose profit margins can be severely squeezed and for the tourism sector for the same reason. All these groups have powerful lobbying bodies, enough to ensure policy changes “for the greater good”.

Enter the SNB which has vowed to purchase “unlimited quantities” of  EUR to defend the CHF 1.20 exchange rate barrier. The ECB was luke warm to say the least in its reaction to the SNB decision, observing that it had been informed of the SNB decision and “this decision has been taken by the SNB under its responsibility” Pontius Pilate could not have washed his hands of the whole affair any better.
What are the intended and unintended consequences?
In simple terms the SNB strategy can be summarized as the more the EUR becomes worthless through money printing, sovereign debt default, or attacks by predatorial speculators, the more the SNB will buy. No Swiss “hausfrau” or “bon père de famille” would ever contemplate doing something so irresponsible.
The more EUR the SNB owns the bigger the danger. If it buys EUR 300 Billon and the EUR goes down a further 10%, a loss of CHF 30 Billion, then the SNB is instantaneously bankrupted. At present we are about half way there. The losses over the last 18 months are USD 29 Billion, 12 times more than the rogue trader at UBS.
This strategy has the risk of turning the SNB into a highly leveraged hedge fund instead of a guarantor of the stability of the currency.
If Greece defaults followed by the other PIIGS then all bets are off and a run on the Swiss Franc could very easily ensue. Thanks to the SNB you could then sell your EUR and get your CHF at bargain basement prices subsidized by the Swiss taxpayer.
Currency speculators the world over are cognizant of this situation, but for the moment there are richer pickings elsewhere, however Switzerland’s time will come very soon. Some may remember when Soros broke the Bank of England, with a well timed and coordinated attack. He is still around and has lost none of his guile.
The SNB are surely fully aware of this situation and the risks. Why apart from pandering to powerful lobbying influences do they do it, and have they taken full account of the potential unintended consequences?
Should the EUR go into oblivion when the SNB has racked up hundreds of Billions more EUR purchases the exchange losses could be gigantic, 50% of GDP or more, impossible to quantify.
Rather than take these colossal losses an alternative would be to abandon the CHF and enter the Euro Zone. A stealth entry achieved against the will of the people followed by abolishment of the CHF.
Should this transpire, Switzerland a country justifiably proud of its democratic system would have been completely outmaneuvered and its 700 year old sovereignty totally undermined, without a shot being fired.
Mr Hildebrand, please abandon the peg before you are overwhelmed by the unintended consequences.  

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