Economy

What In The World Just Happened In Switzerland?

Reposted from: TheEconomicCollapse | by Michael Snyder

Swiss-FrancsCentral banks lie.  That is what they do.  Not too long ago, the Swiss National Bank promised that it would defend the euro/Swiss franc currency peg with the “utmost determination”.  But on Thursday, the central bank shocked the financial world by abruptly abandoning it.  More than three years ago, the Swiss National Bank announced that it would not allow the Swiss franc to fall below 1.20 to the euro, and it has spent a mountain of money defending that peg.  But now that it looks like the EU is going to launch a very robust quantitative easing program, the Swiss National Bank has thrown in the towel.  It was simply going to cost way too much to continue to defend the currency floor.  So now there is panic all over Europe.

On Thursday, the Swiss franc rose a staggering 30 percent against the euro, and the Swiss stock market plunged by 10 percent.  And all over the world, investors, hedge funds and central banks either lost or made gigantic piles of money as currency rates shifted at an unprecedented rate.  It is going to take months to really measure the damage that has been done.  Meanwhile, the euro is in greater danger than ever.  The euro has been declining for months, and now the number one buyer of euros (the Swiss National Bank) has been removed from the equation.  As things in Europe continue to get even worse, expect the euro to go to all-time record lows.  In addition, it is important to remember that the Asian financial crisis of the late 1990s began when Thailand abandoned its currency peg.  With this move by Switzerland set off a European financial crisis?

Of course this is hardly the first time that we have seen central banks lie.  In the United States, the Federal Reserve does it all the time.  The funny thing is that most people still seem to trust what central banks have to say.  But at some point they are going to start to lose all credibility.

Financial markets like predictability.  And gigantic amounts of money had been invested based on the repeated promises of the Swiss National Bank to use “unlimited amounts” of money to defend the currency floor.  Needless to say, there are a lot of people in the financial world that feel totally betrayed by the Swiss National Bank today.  The following comes from an analysis of the situation by Bruce Krasting

Thomas Jordan, the head of the SNB has repeated said that the Franc peg would last forever, and that he would be willing to intervene in “Unlimited Amounts” in support of the peg. Jordan has folded on his promise like a cheap suit in the rain. When push came to shove, Jordan failed to deliver.

The Swiss economy will rapidly fall into recession as a result of the SNB move. The Swiss stock market has been blasted, the currency is now nearly 20% higher than it was a day before. Someone will have to fall on the sword, the arrows are pointing at Jordan.

The dust has not settled on this development as of this morning. I will stick my neck out and say that the failure to hold the minimum rate will result in a one time loss for the SNB of close to $100B. That’s a huge amount of money. It comes to 20% of the Swiss GDP!

Most experts are calling this an extremely bad move by the Swiss National Bank.

But in the end, they may have had little choice.

The euro is falling apart, and the Swiss did not want to be married to it any longer.  Unfortunately, when any marriage ends the pain can be enormous.  The following comes from CNBC

How do you know you’re looking at a bad marriage?

Well if one or both of the spouses can’t wait to get out as soon as the smallest crack in the door opens, you have a pretty good clue.

Something like that just happened in Europe as we learned the real reason why so many traders were still invested in the euro: They had nowhere else to go.

As the Swiss National Bank unlocked the doors on its cap on trading euros for Swiss francs, the rush to exit the euro was faster than one of those French bullet trains.

But this move has not been bad for everyone.  In fact, for many of those that live in Switzerland but work in neighboring countries what happened on Thursday was very fortuitous

“I heard the news this morning. I’m so happy!” Vanessa, who refused to give her last name, told AFP outside of one of many mobbed exchange offices in Geneva.

She has reason to be extatic: she is one of some 280,000 people working in Switzerland but living and paying bills in eurozone countries France, Germany or Italy.

These so-called “frontaliers”, or border-crossers, are the biggest winners in Thursday’s Swiss franc surge, seeing their incomes jump 30 percent in the blink of an eye.

In normal times, things like this very rarely happen.

But in times of crisis, things can change very rapidly.  We are moving into a time of great volatility in global financial markets, and great volatility is often a sign that a great crash is coming.

This move by the Swiss National Bank is just the beginning.  Expect more desperate moves on the global economic chessboard in the days ahead.  But in the end, none of those moves is going to prevent what is coming.

And one of these days, another extremely important currency peg is going to end.  Right now, the Chinese have tied their currency very tightly to the U.S. dollar.  This has helped to artificially inflate the value of the dollar.  Unfortunately, as Robert Wenzel has noted, someday the Chinese could suddenly pull the rug out from under our currency, and that would be really bad news for us…

In other words, the SNB is no People’s Bank of China type patsy, where the PBOC has taken on massive amounts of dollar reserves to prop up the dollar.

Will the PBOC learn anything from SNB? If so, this will not be good for the US dollar.

So keep a close eye on what happens in Europe next.

It is going to be a preview of what is eventually coming to America.

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Bloomberg: Switzerland Ambushes the Global Economy

  • For those.of you who do not understand all this banking mambo jumbo what this means is last night the country of switzerland decided to go gold backed currency many of the world banks get there clue of how to bank model after their banks in order to have to stay positioned within the markets behind the swiss. It has been long standing that switzerland as always tried keep the lead this move to a gold backed asset back on means that they are in a bit themselves from the market which will cause a domino effect on other countries to follow the same which will include currency re valuation and exchange welcome kids to the new time line that you helped manifest your belief that 100 percent of prophecy by God comes true enjoy the next chapter of your lives and everyone said timber

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Switzerland Ambushes the Global Economy

By 

The Swiss National Bank’s shock move today to stop intervening in the foreign exchange market all but guarantees the European Central Bank will finally introduce quantitative easing when it meets Jan. 22. Switzerland is surrendering before a wave of post-QE money fleeing the euro threatens to make a mockery of its currency policy. It’s also capitulating as slumping oil brings global deflation ever closer.It’s an astonishing U-turn. Just two days ago SNB Vice President Jean-Pierre Danthine told Swiss broadcaster RTS that “we’re convinced that the cap on the franc must remain the pillar of our monetary policy.” He added, though, that it was “very possible” that QE would make defending the threshold more difficult. It seems highly probable that the ECB has winked about its policy intentions to its Swiss counterparts.

The ensuing whipsaw in the currency market is unprecedented. The franc immediately appreciated almost 30 percent against the currencies of the Group of Ten industrialized nations, and surged to a record against the euro:

The Swiss central bank has capped the franc’s value since September 2011, intervening to sell its own currency whenever it threatened to strengthen beyond 1.20 per euro. The policy was designed to protect the economy from safe-haven seeking investors propelling the currency higher, and trashing exports.

Many Swiss financiers were affronted by the peg in the first place. The nation’s private banking edifice was built on the principle of respect for private property and free movement of capital; market manipulation didn’t sit well with that philosophy.

At a hastily arranged press conference, SNB President Thomas Jordan declined to comment on whether he’d been in touch with other central banks, saying that keeping the cap no longer made sense and that its end had to be sprung on financial markets. Judging by the televised feed, he isn’t a particularly happy bunny today.

The official explanation posted on the central bank’s website is that the Swiss economy “was able to take advantage of this phase to adjust to the new situation,” and that the dollar’s surge has offset euro weakness. Swiss exporters aren’t convinced: Swatch Group AG Chief Executive Officer Nick Hayek immediately called it a “tsunami for the export industry and for tourism, and finally for the entire country.” Exports of Rolexes and other watches account for more than 10 percent of the country’s exports.

There are a handful of other immediate losers from the move. Any trader who was short the Swiss franc this morning is probably still in a state of shock; Forex.com, a currency trading website, suspended trading in the Swiss currency after the central bank announcement. Staffers at the Swiss central bank’s Singapore branch, which opened in the middle of 2013 to replace the currency-defending night shift in Zurich, will probably be relocating.

Less certain are the implications for lenders including OTP Bank, Hungary’s largest lender, Vienna-based Erste Group Bank, and Italy’s Unicredit, who lent about $14 billion to Hungarians in foreign-currency mortgages  prior to the financial crisis, the bulk of them denominated in Swiss francs. A November law obliges banks to convert those loans into forints, and the Hungarian central bank arranged a foreign-currency transfer at that time to cover those conversion needs. The law obliges banks to switch at about 257 forints per franc; today’s whipsaw puts that exchange rate at 310, meaning any bank that left itself exposed is facing a huge loss.

In an accompanying move, the Swiss central bank will now charge banks 0.75 percent for the privilege of depositing money with it. In the bond market, investors in Swiss government bonds are getting negative yields on any securities with maturities of nine years or less; at one point this morning, your reward for lending to Switzerland for a decade dropped to 0.033 percent, or so close to zero that it really makes no difference.

In the past five years, Swiss consumer prices have dropped by an average of 0.1 percent; the most recent figures showed annual inflation dropped by 0.3 percent in December. It’s clear from the central bank’s comments that today’s actions are intended to lessen the impact of a global deflationary backdrop, since a stronger currency should, according to economic theory, produce higher prices for the relevant country.

For the rest of the world, today’s move confirms that deflation is a clear and present threat to the global economy. Central bankers everywhere should be re-reading Ben Bernanke’s November 2002 speech “Deflation: Making Sure `It’ Doesn’t Happen Here” — and reviewing their policies to make sure they’re doing everything they can to boost growth and make consumers and companies more confident about their economic futures.

To contact the author on this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor on this story:
Cameron Abadi at cabadi2@bloomberg.net

One thought on “What In The World Just Happened In Switzerland?

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