Swiss Euro holdings dilemma


by David Malone

A friend of mine had an interesting conversation with a Swiss banker last week in the Cafe Metropole 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 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 European Central Bank 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.



David Malone is the author of the book Debt Generation. You can read and listen to excerpts from his book here: