Swiss National Bank Confirms Massive FX Intervention Losses, As Spike In M3 Reported
As widely speculated previously on the pages of this blog, the SNB confirmed earlier it has lost billions of euros due to currency speculation in attempting to keep the CHF low. As the FT reports: "The Swiss National Bank on Wednesday revealed the cost of its massive foreign exchange interventions to restrain the value of the franc, with losses of more than SFr14bn ($13.3bn, €10.4bn) in the first half of this year." Following such a massive losses for the small country (nearly 2% of GDP) it was only a matter of time before the other 26 Swiss cantons, which share in the profits and losses of the SNB, said enough. "The SNB said last month it had stopped intervention. Its official reason was because deflationary risks from the surging currency had declined, but most economists ascribed the move to growing concerns about the risks from the massive foreign currency holdings." Yet it appears Switzerland has its gold holdings to thank for keeping the loss manageable, and why, at least the SNB, will not allow a quick depreciation in the price of gold, for as long as the EURCHF continues to be at these low levels: " the central bank was, as in the past, a significant beneficiary of the
surging gold price, allowing it to take big paper profits from revaluing
its large bullion holdings. The rising gold price allowed the SNB to
“hold the loss within certain limits”, it said in a short statement." Elsewhere, we read that the Swiss economy is being aggressively liquefied with both M3 (up 7.7%) and loan issuance (up 4.4%) surging in June.
From Goldman Sachs:
Money growth edges higher, dip in FX reserves confirmed
BOTTOM LINE: Following a rapid growth rate of +7.5%yoy in May – which pushed the Swiss monetary base to a record high – M3 growth increased to 7.7%yoy in June, underscoring the fact that the SNB's FX interventions have led to excess liquidity in the banking system that will need to be mopped up at some point. Also in today’s Monthly Bulletin, final figures published by the SNB confirm an earlier release in showing that foreign currency reserves held by the SNB fell from CHF 239bn in May to CHF 227bn in June.
1. Chart 1 shows the scale of the recent increase in banknotes in circulation and deposits of domestic banks at the SNB. Coupled with already quite lively lending growth, today's out-turn underscores the inflationary risk from the central bank's FX interventions, if left unchecked. The most recent data in Switzerland continues to shrug off any sign of a 'credit crunch': loans to domestic non-banks rose 4.4%yoy in May (Chart 2), still relatively stimulative on a historical basis and a robust rate given the depth of the recession.
2. Alongside the release of money supply data today, the value of FX reserves held by the SNBwas confirmed as falling from CHF 239bn in May (revised up from 232bn) to CHF 227bn in June. These data confirm that, in light of its June Monetary Policy Assessment, the SNB has suspended its FX interventions – originally intended to prevent an ‘excessive appreciation’ of the Swiss france. Despite the policy significance of the confirmed dip in FX reserves in June, the volume of foreign currency assets accumulated by the SNB has increased almost fivefold since the beginning of 2009.
3.) The SNB's balance sheet data have been released at irregular intervals (and by various sources) over the last few months. In particular, the SNB's balance sheet has historically been published only in this release of the Monthly Statistical Bulletin, but recently a 'flash' preliminary estimate of selected line items has been published by the Swiss Federal Statistical Office a few weeks ahead of the SNB. This seems to have agitated the central bank and, as far as we can tell, the SNB will now publish - in the first few working days following the end of the reference month - an estimate of the foreign currency reserve position under the IMF's Special Data Dissemination Standard (SDDS). We commented on this preliminary release on July 6, and today’s Monthly Bulletin confirms the dip in reserves reported in those early estimates.