I have before wondered about the depth of a gnome’s pockets [1]. I am, of course, not speculating about ordinary garden gnomes, but those who occupy the lofty heights of the world of finance in Switzerland. The Swiss National Bank has recently abandoned the peg between the Swiss Franc and the Euro, established in 2011 at SFr 1.20 per Euro. The immediate consequence of this action was for the Euro to plummet in value to about SFr 0.80 per Euro, although it has since recovered to about SFr 1.0 per Euro.
In the short term, this has been unfortunate to a number of interests. Because the exchange rate had been relatively stable since 2011, a false sense of security had been allowed to develop in the currency trading community. Speculators were allowed to trade at very thin margins. When the currency moved substantially in a matter of minutes, a large number of traders were wiped out. And some! The contagion reached back into the brokers who facilitated the trading on thin margins, and they have gone ‘pop’ as well. The larger banks were not excluded from the impact of the turbulence. It is reported that Barclays, Deutsche Bank, and Citigroup have lost a combined amount of $USD 400 million [2]. It is yet unclear how far this contagion will go, but it will certainly test how robust the banking system is.
There is little need to speculate why the Swiss National Bank took its decision. Apparently, defending the Swiss Franc would have cost the SNB about $USD 100 billion in January alone [3]. The prospect of QE in the Eurozone is likely to have raised that figure considerably. As Europeans buy Swiss Francs for Euros, the SNP has had to buy Euros for Swiss Francs in order to maintain the currency peg. It is estimated that the SNB has amassed a total of $USD 480 billion worth of foreign currency since 2011, a figure representing about 70% of Swiss GDP [4]. These holdings will have lost some value since the abandonment of the peg, a loss that will take time to filter into the Swiss economy.
There is greater concern about the wider impact of the appreciation of the Swiss Franc. The Swiss economy relies heavily upon its trade with the rest of the world. A rising currency will make Swiss exports that much more expensive in foreign currency terms. The country also has an extensive tourism industry, and Switzerland has just become even more expensive than t was before the change. It will also have an adverse effect upon the private banking sector in Switzerland, which will become less competitive when compared to other financial centres. All in all, there are grounds to expect that Switzerland will import deflation and recession from the Eurozone in the months ahead.
It is possible to take the view that Switzerland is a small country and that events there have little impact on most of us. That is a very short-sighted view, one that is almost certainly wrong. The importance of recent events is that they show to us that finance isn’t mended, that risky and volatile financial transactions are still taking place, and that we have not left the era of casino capitalism. It is yet to be seen how far the financial contagion from the currency markets may have spread, but there are already rumours of central bank bailouts of financial institutions.
It is still not safe to breathe easy.
Stephen Aguilar-Millan
© The European Futures Observatory 2015
References:
[1] In many respects, this is a follow up piece to one I wrote in 2011, just as the Swiss National Bank established the currency peg to the Euro. It was obvious then, as it is now, that such an arrangement could not go on for ever. http://eufo.blogspot.co.uk/2011/09/how-deep-are-gnomes-pockets.html
[2] A more detailed analysis on the gyrations of currency trading, margin calls, and the impact on day trading can be found in this article from The Economist. http://www.economist.com/news/finance-and-economics/21640305-fallout-swiss-francs-gyrations-only-just-beginning-swiss-miss
[3] More details can be found here: http://uk.businessinsider.com/afp-swiss-central-bank-says-ending-franc-cap-was-best-option-2015-1
[4] More details can be found here:http://www.economist.com/blogs/economist-explains/2015/01/economist-explains-13
In the short term, this has been unfortunate to a number of interests. Because the exchange rate had been relatively stable since 2011, a false sense of security had been allowed to develop in the currency trading community. Speculators were allowed to trade at very thin margins. When the currency moved substantially in a matter of minutes, a large number of traders were wiped out. And some! The contagion reached back into the brokers who facilitated the trading on thin margins, and they have gone ‘pop’ as well. The larger banks were not excluded from the impact of the turbulence. It is reported that Barclays, Deutsche Bank, and Citigroup have lost a combined amount of $USD 400 million [2]. It is yet unclear how far this contagion will go, but it will certainly test how robust the banking system is.
There is little need to speculate why the Swiss National Bank took its decision. Apparently, defending the Swiss Franc would have cost the SNB about $USD 100 billion in January alone [3]. The prospect of QE in the Eurozone is likely to have raised that figure considerably. As Europeans buy Swiss Francs for Euros, the SNP has had to buy Euros for Swiss Francs in order to maintain the currency peg. It is estimated that the SNB has amassed a total of $USD 480 billion worth of foreign currency since 2011, a figure representing about 70% of Swiss GDP [4]. These holdings will have lost some value since the abandonment of the peg, a loss that will take time to filter into the Swiss economy.
There is greater concern about the wider impact of the appreciation of the Swiss Franc. The Swiss economy relies heavily upon its trade with the rest of the world. A rising currency will make Swiss exports that much more expensive in foreign currency terms. The country also has an extensive tourism industry, and Switzerland has just become even more expensive than t was before the change. It will also have an adverse effect upon the private banking sector in Switzerland, which will become less competitive when compared to other financial centres. All in all, there are grounds to expect that Switzerland will import deflation and recession from the Eurozone in the months ahead.
It is possible to take the view that Switzerland is a small country and that events there have little impact on most of us. That is a very short-sighted view, one that is almost certainly wrong. The importance of recent events is that they show to us that finance isn’t mended, that risky and volatile financial transactions are still taking place, and that we have not left the era of casino capitalism. It is yet to be seen how far the financial contagion from the currency markets may have spread, but there are already rumours of central bank bailouts of financial institutions.
It is still not safe to breathe easy.
Stephen Aguilar-Millan
© The European Futures Observatory 2015
References:
[1] In many respects, this is a follow up piece to one I wrote in 2011, just as the Swiss National Bank established the currency peg to the Euro. It was obvious then, as it is now, that such an arrangement could not go on for ever. http://eufo.blogspot.co.uk/2011/09/how-deep-are-gnomes-pockets.html
[2] A more detailed analysis on the gyrations of currency trading, margin calls, and the impact on day trading can be found in this article from The Economist. http://www.economist.com/news/finance-and-economics/21640305-fallout-swiss-francs-gyrations-only-just-beginning-swiss-miss
[3] More details can be found here: http://uk.businessinsider.com/afp-swiss-central-bank-says-ending-franc-cap-was-best-option-2015-1
[4] More details can be found here:http://www.economist.com/blogs/economist-explains/2015/01/economist-explains-13
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