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Smack Down at the SNB
An important development this morning. The Swiss newspaper Neu Zuricher
Zeitung has run an
article on the Swiss
National Bank and its currency intervention policy. The last paragraph
of the article suggests that the head of the SNB, Philipp Hildebrand,
could lose his job over the botched intervention.
I reported on June 18th
that the second quarter results for the SNB would show a loss of ~$8b as
a result of its holdings of Euro’s. Subsequently the FT confirmed my
estimate. And now, the leading business paper in Switzerland (and
historically a mouthpiece for the SNB) has reconfirmed the magnitude of
the second quarter loss.
There are some tealeaves to read here. The CHF is going to move based on
market forces and developments outside of Switzerland. In the past few
weeks the market for the EUR/CHF has stabilized. But there can be no
assurance that this status quo will be sustained. Should conditions in
the EU deteriorate from where they are today the CHF will again come
under a speculative attack as money leaves the Euro for a safer place.
What is different today is that the SNB is frozen. They can’t intervene
any longer. They may have been able to ignore a lowly blogger. They can
pretend that the FT does not exist, but they can’t ignore the article
today in the NZZ. As far as I am concerned the SNB is out of the market.
They are now functionally unable to intervene. It would take a
significant crisis and a major move in the EUR/CHF cross to get them
back in. Based on these developments I would expect that a move to 1.25
in the cross will come. Should things once again turn negative for the
Euro Zone this could happen very quickly.
The Swiss intervention was a colossal error. While the policy was in
place it distorted the market. It had the impact of slowing the weakness
of the Euro against all currencies. That is how the crosses work. The
SNB action had the impact of stabilizing the entire FX market. At least
it did for a few months. Now that the Central Bank has had its hands
tied the market can run free. No more risk that the SNB is going to
muck up a good position. Having won this battle the market will be even
bolder the next time an opportunity to lean on the cross occurs. That is
just a matter of time. FX volatility is about to increase.
Hildebrand is ex Moore Capital. Louis Bacon runs Moore. Bacon has a long
and successful track record of positioning his firm correctly in the FX
markets. In May of 2010 Bacon had this to say. Possibly Mr. Hildebrand
should have listened to his former boss.
Focusing
specifically on Europe, Bacon sees "long-term disastrous consequences
for the (European) Union and Europe."
This is an interesting bit of history that is now unfolding. A central
Banker is being held up to the world for the mistakes that have been
made. Heads may roll. Could this be the beginning of a trend?
»
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bruce, you're spot on here. the snb is clearly too small to take on such large forces. when you have the weaker hand, you either fold, or you get crushed. the snb had the weaker hand relative to all the players in the fx markets it was up against, it foolishly refused to fold, and it got crushed. it really is that simple.
Any ideas on how this will affect euro vs. USD?
Bruce, you cannot be certain what might have happened if the SNB hadn't intervened, just like we can't be certain what would have happened if Paulson hadn't had TARP.
It is conceivable that the Euro-panic could have turned into a rout, and then there could have been a run out of the Euro and/or Euro banks that could have lead to an entire collapse. Also, you don't know what discussions may have been going on between the BIS, IMF, FED, ECB, IRS and the SNB.
In short I would guess that what you are saying is correct, but like so many things in history the truth may never be known, and if it is it may well come out long after we are dead.
I have said on several occasions tht the SNB "Go It Alone" policy was doomed to failure. For FX intervention to be successful it must be coordinated with other CBs. Ask the BoJ. They got creamed too.
What might have happened if they had not intervened? Possibly many of the things you describe. There is growing evidence that all of those measures just delayed an adustment that will have to come.
So how much was spent to buy that time? Trillions. The SNB is a very small part of that. They just happen to visable today. My question is was that money well spent? I think not. In the end it will just make the necessary adjustment that much more painful.
Please explain something to me. I can see how a central bank can get stuck unable to support a falling currency, but why can't the SNB just grind out a pile of francs to stop its appreciation? Why are they restricted to buying Euros or other currencies?
It blows up the money supply, it creates distortions (inefficiencies) and it can cost a pile of dough. It was the latter that caused the Swiss to quit. It just got too expensive.
Thanks Bruce, but still not getting it. Blowing up the money supply I thought would be the action that would induce the desired result, the depreciation of the Franc. And how can it "cost" a pile of dough if you can generate that dough by fiat? Still groping here.
And in Japan the new party wants to push their agenda:
Watanabe’s Your Party to Push Japan Inflation Target, BOJ Steps“We can now use our leverage to push for our agenda,” Watanabe, 58, said in an interview today in Tokyo. “Our priority is anti-deflation legislation because Japan’s economy faces the risk of a double-dip recession. We want to revise the BOJ law so the central bank and the government can agree on a goal of 2 percent inflation within two to three years.”
http://www.businessweek.com/news/2010-07-14/watanabe-s-your-party-to-pus...
Who would have thought banking would turn so exciting when you were a kid?
Isn't that guy, like, fifteen years old??
Politically, I don't think Hildebrand and the SNB had any choice. Sitting on one's hands, or using more orthodox tools to lower demand for CHF would have gone down very badly in the countries neighbouring Switzerland, whose economy depends on a reasonable amount of goodwill in Brussels.
It's also interesting to note that the NZZ says:
a) the losses are not bad enough to threaten the SNB,
b) those who have it in for Hildebrand are the too big to fails and others who want looser policy, and not those who want firmer policy. (dass an einer gegenüber politischer Pression durchlässigeren, weniger dogmatischen Geldpolitik auch die vielen hochverschuldeten Finanzgruppen und Industrieunternehmen der Schweiz interessiert seien) Omitting this completely confuses what the debate is about.
I though Hildebrand was masterful during the Lehman crisis.
I suspect ECB and Fed were begging for SNB intervention to get Franc down. If approximately 80% of Hungarian mortgages (and many Polish and even Austrian) and other consumer borrowings are denominated in Swiss Francs, then the implications for inability to debt repay and Austrian banks huge exposures to those country's debts (consumer and sovereign) put the EU and Europe at further enormous risk. It ain't just the PIIGs. Iceland too had large borrowings in Swissey.
Foriegn currency loans are estimated to represent over 90% of Latvian borrowing and more than 60% in Romania, Bulgaria, Lithuania and Estonia.
Huge implications for Europe. Certainly Switzerland has difficulty with currency control with so much long term borrowing involvement by foreigner outside her control.
You say that SNB had no choice for political reasons. So politics forced monetary policy decisions? At the SNB? Should it been determine that "politics" was behind the decisions made by Mr. H there will be hell to pay.
The SNB sells itself very much as an independent central bank. I hope what you suggest is not correct.
When you write that an Oxford-educated economist's policy was "doomed to failure," as you do just below, you are making my point for me.
So far the facts are proving me right. Go It Alone is a policy that will not work.
You are right, Oxford is world class.
So are these:
Education:
Harvard University, B.A., Economics, 1975, summa cum laude.
Massachusetts Institute of Technology, Ph.D., Economics, 1979.
That's Ben Bernanke. Also as good as it gets in academia. Enough said.
Have you ever considered that Bernanke might just be spectacularly successful.... in representing the interests of America's rentier class? America's rich are getting much richer, and as for the others, they're somebody else's problem.
Hildebrand on the other hand, is, as the NZZ writes, incurring the displeasure of financial institutions in his country.
I earned my Ph D from a top notch university. All it demonstrates is mastery of one topic. Usually that topic is highly theoretical and disconnected from much of reality. It is where the term "educated idiot" comes from. Plenty of educated idiots to go around with helicopters and pixie dust.
You need to be very careful and distinguish between "politics" in the sense of doing favors for, and swapping favors with, individual actors on the national level, and "politics" in the sense of bearing in mind the overall political contraints the country's entire country is exposed to.
The first are as you say, a total plague; the second, I fear, a fact of life. The Swiss realize that they have to be careful to what extent they capitalize - or are seen to be capitalizing - on Europe's weaknesses.
As I understand it, in the 70s when they had an analogous situation of crisis purchases of the CHF driving it way up, and ultimately solved the problem by having banks pay negative interest on (was it new?) deposits; i.e. depositors paid to be allowed to deposit. Such fixes would have presented themselves once again, but I don't think they're politically palatable.
I hope you're not claiming that the ECB and the Germans are not including political calculations in their decision making.
The actual losses will be less than the ones attributable to the SNB Euro holdings. They have gold and dollars, these appreciated in value relative to the CHF during the quarter. If the number were to come in at a net CHF 5-7b it would not impact the SNB in any significant way. This is an eyesore. Not a signficant financial event for the SNB.
What is important is that failed policy is leading to public pressure on those that executed the policy.
No one, including Hildebrand, was "masterful" in the Lehman crisis. That was a bungle job accross the board.
Bruce,
As usual (of all your FX posts) this is quite informative and well written. You seem to be implying some other ECB big dogs will get the guillotine. Are we talking Trichet here Bruce?? We want names.
Also, if the Euro finally does a swan dive into an empty swimming pool, how would this affect the bigger European oil Giants???? Although I give you a hard time on your GSE and government assistance posts, your wisdom on the above 2 Questions would be GREATLY appreciated.
Thanks again for another excellent piece of information. I can't help but think that the SNB was thrown to the wolves as the first line of defense and it will all be up to Ben from this point on.
The USA took France territory back militarily and handed it back to France on a silver platter during WWII with zero "Thank you", why wouldn't Bernanke take US taxpayers' money and save Trichet and France's ass now monetarily so they can wave their stinky underarms at us and tell us how Low-class McDonald's is.
I am certain that Ben will eagerly run to the rescue of the EU elites. I am also sure that if the SNB is done then the load just got alot heavier.
Ben has failed miserably up to this point. Expect that to continue.
Ben Shalom Bernanke can fail to infinity, as he uses/controls a FIAT currency that is backed by nothing of value and so costs nothing to create. Due to this fact, the US Federal Reserve can easily create an unlimited supply of Federal Reserve Notes (dollars).
Market, that is true until everyone stops believing in the charade. It can't go on forever even though it feels that way.
Bacon.. Bulls.. i shouldn't of skipped breakfest
In the words of Gerald Celente, "Current events form future trends."
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