Global Agenda: Swiss franc, RIP

If the rumor that the Swiss banks will begin to charge negative interest rates on deposits is true then people will have to rethink their investments.

Grossmunster Cathedral in Zurich 311 (photo credit: Comstock)
Grossmunster Cathedral in Zurich 311
(photo credit: Comstock)
Even within the context of the kind of extraordinary developments occurring in the global economy, the demise of the Swiss Franc is surely in a class of its own for two main reasons. First, the currency – and, I would argue, the country it represents – is a victim of its own success, in absolute contrast to the numerous examples from around the world of currencies and countries that are being crushed because of their prolonged failure. Secondly, and again in contradistinction to the also-rans, the franc did not die of obesity and its complications. Rather, despite being in perfect health, it took a clear and considered decision to shoot itself.
That decision was announced on Tuesday by the Swiss National Bank. The SNB has for generations been the world’s most successful central bank in carrying out the basic mission of central banks: namely, maintaining the value of the nation’s currency. Thanks to its efforts, the Swiss franc won and kept a well-deserved reputation for stability, which made it a “safe haven” in times of trouble.
This status was parallel to, but different from, Switzerland’s own status as a haven. The latter related to the safety of money placed with Swiss banks and rested on, inter alia, the secrecy laws that enabled Swiss banks to refuse to divulge the identity and details of the owners of the monies placed with them.
Switzerland’s role as the world’s financial safe haven took off when the French Revolution threatened the assets and persons of the French aristocracy. It expanded enormously in the troubled 20th century, when everyone from European Jews to their Nazi pursuers, as well as criminals and dictators from around the world, made good use of the services that Switzerland, its banks and bankers had to offer (for a fee, of course).
The same political and other struggles that created the need for a safe haven for money undermined the value of the currencies of the countries involved in those struggles. The losers, of course, were entirely wiped out. But even the victors paid a very heavy financial and economic price. The ever-neutral Swiss, with their ever-vigilant bankers, suffered no such erosion in their currency, making it ever more valuable. In times of trouble, people knew that Swiss francs offered safety and stability.
This status survived the demise of Switzerland’s role as a financial safe haven over the last 10 to 15 years. The United States conducted a protracted and relentless campaign to break down the Swiss laws and, with the support of the EU, achieved its goals – not just in regard to Switzerland, but with respect to all the “offshore” financial centers in Europe, from landlocked Luxembourg and Austria to the genuine islands in the English Channel, and even much further afield in the Caribbean.
More amazing still, the Swiss franc was able to transcend the descent into gambling and near-criminality on the part of the supposedly solid Swiss bankers, especially the two main ones: UBS and Credit Suisse. Their antics brought them to the edge of destruction in 2008 and have left them in a parlous state ever since.
But that did not detract from the Swiss franc’ allure. Over the past several years, as the two main currencies in the developed world – the US dollar and the euro – vied with each other in their efforts to erode their own value and make themselves undesirable to own, the Swiss franc emerged as the most reliable and most desirable of the secondary currencies.
As the crisis in the euro area intensified, the flow of money from countries using the euro to Switzerland swelled into a flood. The inevitable result was a steady rise in the franc’s value against the euro and, by extension, against everything else – especially the US dollar.
After years in which the franc’s trading range against the euro had been between 1.40 to 1.70 francs to the euro, it rose ever higher – past 1.20 and even 1.10, until “parity” seemed both imminent and inevitable. Along the way, the SNB did what it could to block or at least slow the rise, by reducing interest rates to almost zero and by intervening directly, buying huge amounts of euros – but to no lasting effect.
The rise in the franc versus the euro and other European currencies made Swiss exports – both goods (e.g., chocolate, but more likely chemicals and pharmaceuticals) and services (tourism) – impossibly expensive for more and more people.
With its banking sector already in deep trouble, the future of the country’s economy was on the line.
Only that existential threat can explain how the SNB was persuaded to effectively sacrifice the currency to save the country. Yet, when the Swiss first leaked the idea of linking their currency to the euro, this was greeted with disbelief and derision; it implied printing vast amounts of francs and threatening the Swiss economy with the dreaded inflation disease.
But on Tuesday they went ahead and did it: The SNB announced it would buy any amount of euros offered to it at the price of 1.2 francs. The immediate result was that the franc slumped another 9 percent, to above 1.20. At some point, the commitment will be put to the test and the SNB will spend – effectively print – many billions of francs to buy euros.
The entities buying the francs will then have to do something with them. If the other recent rumor – that the Swiss banks will begin to charge negative interest rates on deposits (i.e., you pay them for taking your money) – is realized, people will have to think long and hard about whether buying and holding Swiss francs is something they really want to do, and whether playing poker with Swiss central bankers is such a great idea after all.