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Official Estimates Confirm Zero Hedge Projections That SNB Will Suffer €8 Billion In FX Interventions in Q2
A few weeks ago it was speculated on Zero Hedge that the total losses experienced by the SNB as a result of ongoing currency interventions in Q2, were in the €8 billion ball park arena. Today, the FT picks up on this theme and reports that "the Swiss National Bank may have suffered paper losses of up to SFr10bn (€7.5bn) from huge interventions in the currency markets to restrain the value of the franc. The central bank is expected by market observers to report a big loss when it publishes second-quarter accounts in mid-August. Economists cannot make a precise forecast, as the SNB does not reveal when, or at what rates, it has sold francs and bought other currencies – mainly euros – in recent months. However, Martin Neff, chief economist of Credit Suisse, said: “It’s certain there will be a big loss.” And while that may not seem like a large number at first glance, as Bruce Krasting pointed out, "The 8.4b loss for the SNB would be equivalent to a $200 billion loss for the Fed. So actually this is a very big deal."
Some more on this from the FT:
An indirect acknowledgement of the potential pain came last month, when the SNB did a U-turn and said it was suspending interventions.
The bank attributed the move to declining concerns about the deflationary risks of a rising franc to the domestic economy. However, outsiders saw the step as an acknowledgement that intervention had failed.
The SNB’s foreign exchange reserves have more than quadrupled to SFr230bn since the financial crisis, with the total increasing by SFr135bn since December 2009. During that period, the franc climbed from SFr1.50 against the euro to about SFr1.33, and, recently, has briefly surged higher.
The appreciation has stemmed from fears about eurozone recovery prospects and the risk of a sovereign debt default, compared with Switzerland’s traditional haven status.
The franc has also gained from the relative strength of the Swiss economy. Growth is rising, while domestic consumption has remained robust. Last month, the SNB raised its 2010 growth forecast from 1.5 per cent to 2 per cent.
And, just like us, the FT is troubled by the complete lack of concern by the market in light of these adverse developments:
The prospect of a big loss has caused little concern in Switzerland, a situation all the more striking given the SNB’s unusual status among central banks of being a quoted company.
While 61 per cent of its shares are owned by Switzerland’s cantonal banks, the remainder are in private hands and the SNB has no explicit guarantee from the Swiss Confederation.
Economists attribute the relative calm to shareholders’ understanding for the SNB’s long-term thinking: a rising euro could even lead to profits on the reserves one day.
“A central bank doesn’t have to worry about showing nice profits every quarter or about a downgrade from a rating agency. So there’s no drama,” said Mr Neff.
Other economists added that past losses on currency intervention had sometimes been compensated by windfalls on gold, given that the price of gold has tended to rise during crises.
While we are confident that at the end of the day the price of gold will surely surge to cover a part of the paper losses, another issue, which we covered yesterday, is that as a result of over $500 billion in CHF denominated loans to Central and Eastern European countries (equivalent to the nominal GDP of the entire country) once loans start being unwound due to the massive strengthening in the swiss franc, leading to a vicious short covering cycle in the CHF, the adverse impact on the Swiss economy will be substantial. And yes, the central bank will have quite a bit to worry about then when coupled with the massive FX losses, the SNB has to turn on the same printing machinery made so popular in the US and the EU. A detailed recent discussion of this critical issue, which has been successfully swept under the rug for the time being, but which will soon be the topic de jour once attention shifts to Europe's strongest economy, can be found here.
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Throw paper and gold in a furnace, see what happens.
Thanks for the outstanding work.
Equivalent to Fed losing $200 billion? Ouch!
Actually thinking about it some more, not that much.
Does that make me schizophrenic?
...
Swiss should have stuck to what they do best, hold lots of gold & money for others.
They are suffering from a double-whammy. While they attempt to debase their currency (against the Euro), the fact that their currency is backed (up to 40%) by gold helps to keep the relative value of the Swiss Franc high in comparison to those currencies that are now off of the gold standard.
I thought the Swiss prided themselves on being good financiers ?
It all looks like neo Keynesian retardation to me....
Ordinary Swiss people often feel that their central government is too concerned with the dozen or so global Swiss companies (such as Nestle, big pharma), who see immediate effects if the currency rises by too much.
There's also the possibility that the big banks (esp. UBS and Credit Suisse) have big bets (such as being loaded up on euro-denominated stuff) that would go south and require bailouts all around.
I was planning a trip to the home country. A week or so in Ticino. The lake country is beautiful. Hike and pick edelweiss, geschnatzeltes for dinner. kirsch to wash it down.
Forget that now. Personna non grata. Possibly NJ instead.....
Sorry to hear that Bruce ;
Sometimes the truth hurts, but who knows may be in future you might be the most respected financier by telling the truth in Switzerland .
Bruce, can you elaborate? Why are you "non grata"...
Just joking. I have a bunch of relatives outside of Aarau. Love Switzerland.
This business with SNB is just something to write about. Somehow this crazy story fits in very logically with what is going on.... I can't find that logic, but I continue to look.
Classic type II error....assuming intervention will even work.
Want your currency to depreciate? Print more money, engage in open market operations selling such. Right. Absolutely correct first step.
Second step, what to buy? Euro is headed for oblivion. Do Not Need to Purchase Euros. Why not buy gold, A$ or C$, something that makes some sense.
In essence, the pounding the SNB took was forgetting that they were trying to Cheapen the Swissy, NOT trying to Support the Euro.
Bad decision. Kind that in the Private Sector, folks get fired. Anally and abysmally short sighted, bankrupt, cancerous implementation.
Just like we don't know what would have happened if Bush hadn't taken out Saddam, so do we and the SNB not know what would have happened if the SNB hadn't intervened. Saddam would have no doubt killed hundreds of thousands of Kurds and Shia and might have taken down KSA and started WWIV. If the SNB hadn't bought those Euro's then there might have been a default by a major bank in Austria or Hungary that would have caused another '29 style crash...
Now this? This is special drivel. Folks, you can't get this kind of slack-jawed claptrap just anywhere. No, you've got to go to someone still fighting a war from the 19th century to get this kind of rubbish.
In your first sentence you attempt to build an already-weak foundation for your analysis of the SNB issues by stating that we don't know what would have happened if Bush hadn't taken out Saddam.
Of course, you contradict yourself immediately by supposing that Saddam would have no doubt...
What?
Then, of course, there's your wonderful argument that hundreds of thousands might have died. Since you've obviously been preoccupied with your Gettysburg reenactments, please permit me to fill you in.
Hundreds of thousands of Iraqis have died, by our hands, along with over 4,400 US soldiers.
http://www.icasualties.org/
What?
Taken down KSA? Started WWIV?
What? And, what?
If the Swiss had not purchased Euros then we might have a major bank default?
What?
Another '29 style crash?
What?
Clearly, the captcha is not doing its job. I went to Wikipedia to look up which logical fallacy you'd exploited here, only to find out you had miraculously covered almost all of them.
http://en.wikipedia.org/wiki/List_of_fallacies
Wow. Just wow.
MP
Saddam would have no doubt killed hundreds of thousands of Kurds and Shia and might have taken down KSA and started WWIV.
Using those well-documented WMDs, no doubt.
Good thing we have the US to protect us.
I am not at all convinced that this line of reasoning does the situation justice.
From a purely financial perspective, the intervention was a loss. However, Switzerland, which is in good financial shape, is surrounded by much bigger countries in bad to horrible financial shape, on whom it is dependent, and to have done nothing to "help" its neighbors would have been very ill-advised from a psychological viewpoint.
Now they can say "We tried to help, but your problems are of your own doing, and, as you see, we as a small country will get flattened if we try to solve your problems, so we wish you all the best, but please leave us alone."
€1000 per inhabitant for 2 years of peace while the Eurocrats tax their subjects to death is a very good deal.
Muesli, Switzerland is not in good financial shape, as you wrote. I mean if you compare it to its neighboring countries it is, but it isn't (unfortunately) the haven it used to be a couple of decades ago. Just look at unemployment numbers over time. we could be better off if our administrations and politicians were just a little less retarded...
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