A friend of mine had an interesting conversation with a Swiss banker last week in The Cafe Metropol in Zurich. The cafe happens to be just across the road from the Swiss National bank and is a favourite watering hole.
The Swiss banker suggested that the big Swiss banks and the Swiss National bank are beginning to have a good old panic about the strength of the Swiss Franc, what that strength is doing to their exports (think pharmaceuticals) and the government’s inability to do anything about it.
In the race to devalue, the Euro is winning, the dollar is doing badly but the Swiss Franc is on speed and steroids combined.
The Swiss bank employee said all the banks are feeling jumpy about the value of the franc and its prospects for further strengthening. Every increase in the franc’s value increases the pressure on countries like Poland and Hungary, and raises the level of defaults. Defaults which hurt their own banks and those of Greece, Austria and Italy. The problem for all concerned, the debtors and the lenders alike, is that so many loans were taken out in Swiss Francs when the Swiss rate was much lower than rates in the local currency, but now that the Swiss Franc is so very strong in value, paying those loans back is crippling.
Sadly for Switzerland, problems with its own currency are just half of it’s problem.
The other half is that the Swiss Central Bank is stuffed to bursting with Euros it has bought in its failed efforts last year to weaken the Franc. The Central bank sold francs and bought hundreds of billions of euros and all to no avail. The flow of deposits from all parts of Euro land, from Greece and Ireland to Austria and Italy, plus those from elsewhere who bought Swiss francs as a safe haven investment, all combined to swamp the Swiss Central Bank’s efforts.
So now the Central bank has hundreds of billions of euros sitting in its vaults while its own currency continues to strengthen making its exports more and more expensive. What is the Swiss Central Bank to do?
It can sell, do nothing or buy more. Each has its problems.
If it sells its Euro holdings the Euro will weaken further. And let’s not forget that many of the private fortunes Switzerland houses are in Euros. A minor point but not one lost on Swiss bankers and their clients. Even if they did decide to sell and lower their exposure, where can they possibly puke up hundreds of billions of Euros without anyone smelling their discomfort?
If the Bank buys yet more Euros to help protect the Euro which they hold so much of, it begins to expose Switzerland to a very real danger of sustaining crushing losses if the Euro should still fall apart. It ties Switzerland to European and ECB policies in a way they cannot countenance. They could find themselves hostage to EU decisions.
If the Bank does nothing and tries to stay neutral, their economy will become even more lopsided in favour of finance than it already is and their exporters, and the employment and GDP they represent, will all suffer. By doing nothing to ‘help’ the Euro they would leave the EU with fewer options and could see the EU trying to go it alone, trying to print up more Euros for an expanded EFSF which could end up with the Euro facing a crisis of value as the bond market losses faith in it.
We have a good idea just how much this scenario worries some in Europe, because French Prime Minister Francois Fillon said on the eve of a trip to Britain that the UK must be prepared to help save the Euro. If a French Prime Minister can bring himself THAT close to grovelling to Perfidious Albion, you know the Europeans are feeling rattled.
OT to this post but re "untouchable aristocracy:
PM Boc attempts to esquew the Central European Bank and cut salaries at the National Central Bank by 25% / Trichet, CEB chief warns that what the government attempts is illegal
de A.C. HotNews.ro
Luni, 30 august 2010, 18:09 English | Regional Europe
Romania's Finance ministry sent, on August 19, another ordinance draft to the Central European Bank in which the 25% cut of salaries within the National Central Bank is hidden, after the previous draft which ruled the same cut received a negative response from the Central European Bank. CEB President, Jean Claude Trichet expressed his concern that Romania's Finance ministry cannot understand that they cannot cut salaries in a central bank. The project reads that the sums reduced from salaries should remain at the National Central Bank from which the government takes 80% – the profit that the central bank sends to the government.
The opinion of the European bank is loud and clear and can be translated into "please do not attempt to bully us, it is not working" which means that the Treaty is not respected. The decision of the government to cut salaries of the National Central Bank employees and the forced trasfer of those sums to the budget was criticized by the CEB that urged the government to modify the law, by the European Commission that threated to launch the infringement procedure and to the IMF that insisted to include the commitment that the government will cancel their recent reckless initiatives.
HERE is a link to the article that TheDeadFauvi mentions.
Even if they did decide to sell and lower their exposure, where can they possibly puke up hundreds of billions of Euros without anyone smelling their discomfort?
Such appropriate & compelling imagery! Thanks for illuminating this problem (which I had never heard of before today.) Somewhat ironic that what is usually considered a positive attribute (healthy currency) is now proving a great dilemma for those smug Swiss bankers.
While it sometimes seems as if the neoliberal machine is an unstoppable monolith storming the earth & subduing all in its path, it's good to know, in detail, that this is far from true. Thanks Golem.
Never fear, Golem acolytes, for Sarkozy & Merkel are working feverishly on our behalf to resolve the crisis. How do I know? I read in it The Love Story of Angela & Nicolas in the New York Times:
SHE MAKES FUN, in private, of the way he walks and talks, of his rapid, jerky gestures and facial grimaces. He mocks her deliberation, her reluctance, her matronly caution. She has compared him to Mr. Bean and to the French comic Louis de Funès, with his curly hair and large nose. He sometimes calls her La Boche, the offensive French version of “Kraut,” and goes out of his way to give her an embrace and a double-cheeked kiss in the French fashion, the kind of contact that he knows very well, aides say, she cannot stand.
Why dig too deeply into the messed up relationship between France & Germany as their banks look over the precipice, when they're such a cute couple?
More news from Switzerland:
BLOOMBERG:
Swiss National Bank May Post Record 2010 Loss as Euro Slump Cuts Reserves
By Klaus Wille – Jan 15, 2011 1:00 AM GMT+0100
"Switzerland’s central bank said it may have posted a record loss in 2010 as the euro’s slump eroded the value of its currency reserves.
The shortfall amounted to an estimated 21 billion Swiss francs ($21.8 billion), the Zurich-based Swiss National Bank said in a statement late yesterday. That’s about 4 percent of the size of the economy. Exchange-rate-related losses were about 26 billion and gold reserves had a valuation gain of about 6 billion francs, according to the statement…."
http://www.bloomberg.com/news/2011-01-14/swiss-central-bank-posts-full-year-loss-of-21-8-billion-on-slumping-euro.html
THE OBSERVER:
Swiss whistleblower Rudolf Elmer plans to hand over offshore banking secrets of the rich and famous to WikiLeaks
By Ed Vulliamy, The Observer, Sunday 16 January 2011
The offshore bank account details of 2,000 "high net worth individuals" and corporations – detailing massive potential tax evasion – will be handed over to the WikiLeaks organisation in London tomorrow by the most important and boldest whistleblower in Swiss banking history, Rudolf Elmer, two days before he goes on trial in his native Switzerland.
British and American individuals and companies are among the offshore clients whose details will be contained on CDs presented to WikiLeaks at the Frontline Club in London. Those involved include, Elmer tells the Observer, "approximately 40 politicians"…
http://www.guardian.co.uk/media/2011/jan/16/swiss-whistleblower-rudolf-elmer-banks
Regards from the Irish Whistleblower,
http://whistleblowerirl.blogspot.com/
HERE are the statistics from the Swiss National Bank. Turning to page-18, I'm fascinated by the massive increase in foreign currency investments. Year-on-year, the total increase in FX investments has more than doubled to 218 billion Swiss francs. At the end of 2008 the total was 'only' 47 billion CHF.
Has Switzerland become a dumping ground for weaker currencies? Come on! There must be some good conspiracy theories out there.
@The Irish Whistleblower
It is interesting that Rudolf Elmer is telling us exactly what he is going to do. Perhaps he fears for his safety, or is intending to become a martyr. Not wishing to be insensitive, but I hope he has backups.
Hi RichGB,
Your suggestion re Elmer's motives seem to be 'on the money', have a read of this:
"The following circumstances are reasons and motives for the immense danger my family and I are subjected to.
Homicides
Cayman Islands, February 2008, Frederic Bise, a Swiss banker from Lausanne has been murdered. The case until today is unresolved. Julius Baer Trust Company, Cayman Islands, is involved into the Salinas case (former Mexican president). This story in part relates to the asset manager of Raul Salinas, Curtis Lowell jun., supervisory board of Julius Baer Trust Company, Cayman Islands and also representative for Julius Baer in Mexico City until the whole story got disclosed in 1995. The Swiss criminal prosecution is engaged in a criminal proceeding against Curtis Lowell jun. since 1995, in respect to money laundry, drug dealing, embezzlement and other crimes (in detail: BGE 133 IV 235). Raul Salinas brother was killed in 2004 and the Salinas funds of around $130.000.000 remain frozen in Switzerland as of a 2006 ruling. The case is not resolved yet, Mexico and Cayman are still investigating, but it is known that witnesses in this case have been threatened and also eliminated (information from the Swiss inquisitor in this case).
Evidence 01 Consultation to the appeal of 13.04.2006, no data theft, not responsibility of Switzerland as per prosecutor A. Bergmann
Evidence 02 Murder of Frederic Bise, Swiss Banker, 13.02.2008
Evidence 03 133,IV.235 Excerpt from the ruling of the court of cassation, Swiss Federal Prosecutor against X, Y and Z (nullity complaint), File number 6S528/2006 of 11th of June 2007 (Salinas – Curtis Lowell jun.)
Evidence 04 Confirmation of worktime of Rudolf Elmer by Bank Julius Baer, 06.06.2006"
http://mirror.wikileaks.info/wiki/Rudolf_Elmer_files_against_Swiss_banking_secrecy_at_ECHR/
On a separate note, here is the latest on the Irish Central Bank's 'creative-accounting':
http://www.telegraph.co.uk/finance/economics/8262982/Irish-lenders-besiege-central-bank-for-emergency-loans.html
“The names on the CDs will NOT be made public,” [1]. (Caps emphasis mine) Looks like he want an insurance policy, like Assange’s Murdoch one.
1. http://www.guardian.co.uk/media/2011/jan/16/swiss-whistleblower-rudolf-elmer-banks
On topic now. Just a small note, another country facing this dilemma, rising currency affecting exports, is New Zealand. One of the top 4 performing currencies in 2010 (along with the Franc). A small nation with no real economic clout, losing the race to devalue. Very dependent on exports and tourism. Another victim of the printing presses in the US and EU and the race to devalue.
The Swiss should use dump thier Euro's and buy Gold, then after that use thoer strong currency and buy Gold, thus spiking Giold and devaling the SF against it. It would also provide a way to flood the world with SF's without counter-party risk and drive the SF down however low they want too, while acquiring large FX Gold reserves.
Good post but I disagree with the tone and implications for the Swiss. A strong currency means cheaper imports etc. It also allows individuals to buy foreign currency if they wish. The real problem is that they have wasted money and time and reputation in buying euros! What a wasted effort, as if they in concert with whomever, could stop what the EU is doing! EU is trashing euro through talk of sovereign default. Brilliant if you are stuck with a fiat currency. NZ however is a commodity economy, like Australia another even stronger currency. We in Oz are coping as even with the higher currency we cannot supply demand thanks to China and India investing so heavily in infrastructure. Switzerland has charged for deposits. As these deposits now increase even more than heretofore, they can increase charges and use the soundness of their currency to attract even more money. Gee it stinks to be Swiss!!! They obviously lack imagination or are pawns of another power?
So I reluctantly disagree!