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Is The Swiss National Bank Using UBS To Launder Its Euro Purchases?

Tyler Durden's picture




 

Libor keeps rising as the short-term funding situation in Europe gets worse by the day: today USD Libor hit 0.50969%, a change of 0.01281% from Friday, the first time this metric has pushed over 0.5% in about nine months. The Libor reporting dispersion among BBA member banks has actually tightened marginally from last week, with one notable outlier: UBS. Of the 15 banks that report both USD and EUR-based LIBOR, all disclose a higher offer rate for EUR Libor except for UBS! The Swiss bank is a blatant outlier, in that its disclosed EUR Libor rate of 0.4850% is in fact 10% lower than its USD Libor. Just how big are the dollar funding needs of UBS, which many see as an "open market operations" vehicle for the SNB, a bank which it is no secret is now openly intervening in FX markets, and thus likely has provided a lifeline to UBS to provide this lower EUR Libor rate compared to US Libor. So how would the circle jerk go: SNB buys EUR in the open market (causing massive destruction in the EURCHF and GBPCHF pairs), then the excess euro holdings are funneled back into the market via a much cheaper EUR lending rate in the 3M funding market (LIBOR) compared to all other banks: the UBS 3M EUR Libor rate is a whopping 30% below the average EUR Libor rate of 0.6344%, nearly double the spread from average of the next lowest EUR Libor offer, that of RBS at 0.56%.

Below is the 3M USD Libor by BBA bank:

And here is the 3M EUR Libor by BBA bank:

Note the material variation of UBS EUR Libor from the average:

And here is the critical difference between a BBA bank's EUR and USD libor fixing. Something is certainly off with UBS.

 

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Mon, 05/24/2010 - 11:47 | 370120 sheeple
sheeple's picture

UBS 3m EUR LIBOR were around the 0.56 mark prior to this, dispersion is too steep

Mon, 05/24/2010 - 11:52 | 370133 Ragnarok
Ragnarok's picture

Why do the Swiss want to weaken their currency?  Could someone please enlighten me to their fiscal/banking/sovereign situation?

Mon, 05/24/2010 - 12:03 | 370157 Attitude_Check
Attitude_Check's picture

Swiss exports (including tourism) get crushed with a strong franc compared to the Euro.

Mon, 05/24/2010 - 12:16 | 370208 JiangxiDad
JiangxiDad's picture

Why don't export-dependent nations with increasing currencies lower their  prices? The same could be asked of Swiss hoteliers. That should increase demand.

Mon, 05/24/2010 - 12:24 | 370234 primefool
primefool's picture

Because they like making profits!! Remember for many local business ( hotels for example) - their costs are in CHF and their revenues are in CHF - so if they reduced their prices - they will kill their profits.

Mon, 05/24/2010 - 14:24 | 370568 JiangxiDad
JiangxiDad's picture

True, but the issue was exports and tourism.  Products and labor can be sourced from less expensive lands. This is the free mkt. in operation--you can't really get around it, and certainly FX mkt. interventions have no  lasting impact.

 

I mean if the Swiss were truly upset about having a strong currency, there are many disreputable but fun things they can do about it.

Mon, 05/24/2010 - 16:37 | 370865 BlackBeard
BlackBeard's picture

Try explaining that to a Keynsian.

Mon, 05/24/2010 - 13:43 | 370463 ArsoN
ArsoN's picture

It's note worthy that their banks lent billions in CHFs (their interest rates were favorable 2000-2005) to everyone, but especially to Eastern Europeans (some countries have outstanding CHF mortgages in multiples of their own GDP).  Those Eastern European currencies have been getting KILLED again recently on the "flight to quality".  

Mon, 05/24/2010 - 15:37 | 370714 Canucklehead
Canucklehead's picture

That's how I see it too.

Mon, 05/24/2010 - 17:01 | 370916 Ragnarok
Ragnarok's picture

Save the appearance of solvency for Swiss banks....  Sounds about right.

Mon, 05/24/2010 - 14:35 | 370597 old_turk
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Exports are just a small consideration.

Swiss banks have a lot of euro denominated loans outstanding.

Think about it.

Pay off the loan with a 'cheaper euro' (in the banks eyes) is very deflationary (after the subsequent FX crosswalks.)

I believe that in the SNB's initial statement on the matter of intervention ... they stated as much.

Mon, 05/24/2010 - 11:56 | 370148 SWRichmond
SWRichmond's picture

What's really incredible is that they think they can keep this up.

Mon, 05/24/2010 - 12:01 | 370151 primefool
primefool's picture

I think this Euro intervention will fail. Because this kind of taking water out of one end of the pool and putting it into the other end - wont work for more than a day or two. I they really want to stregthen the Euro - they will have to reduce Euro liquidity - and this is at cross purposes to what they need to do given the parlous condition of the banks.

And I cant believe they are too concerned with the level of EUR/USD - after all it was at 87 cents in 2002 - so not particularly low at the moment .

The swiss dont want to suffer from becoming the receptacle for all that flight capital - so they need to periodically scare speculators off. I get that.

Mon, 05/24/2010 - 12:03 | 370154 if
if's picture

Seems unfair that Credit Suisse doesn't get a piece of the action.    

Mon, 05/24/2010 - 12:05 | 370163 Attitude_Check
Attitude_Check's picture

I think both UBS abd CS are bound to fail, and Switzerland is WAAAAY to small to "bailout" either.  What is the effect on UBS's bottom-line if it is being used this way?

Mon, 05/24/2010 - 12:13 | 370194 if
if's picture

Trading on behalf of your central bank is almost certainly very profitable work.

Mon, 05/24/2010 - 12:38 | 370275 Ripped Chunk
Ripped Chunk's picture

Just ask GS

Mon, 05/24/2010 - 13:23 | 370405 ConfederateH
ConfederateH's picture

UBS and CS will probably be the last western big banks standing when the dust settles.  Why? 

- Switzerland's reputation for bank secrecy

- Switzerland's history of neutrality and refusal to join both the EU and the Euro

- Switzerland's Canton's ability to make "Pauschalabkommen" with the wealthy (where the utlra rich promise to pay a fixed, flat fee every year without any questions as to total assets or income)

- Switzerland's location in the heart of Europe with 4 different languages

- Switzerland's strong, relatively unraped constitution modelled on the US

- Switzerlands strong civilian military and ease of defense through possesion of crucial mountain passes

But these factors don't give the real explanation, which is that just as the dollar has benefitted from a flight out of Euro uncertainty, so have most of Europe's old wealth already secured property in Switzerland and  the nouveau rich from all over Europe and Arabia are sending wealth there.  As the crisis moves from a low simmer to a boil the worlds rich will look for high land, and that will most certainly be Switzerland.

The bad side is the the franc, like gold, will really take off when the flight out of Euros is complete and the flight out of dollars takes off.

Mon, 05/24/2010 - 13:39 | 370449 Paystee Gangsta
Paystee Gangsta's picture

I'd move there, but they don't have beaches... or the Kardashians... with whom would I "keep up?"!  - it is too dreadful to contemplate - lol bffs!!!

Mon, 05/24/2010 - 15:41 | 370720 Canucklehead
Canucklehead's picture

If the Eastern European mortgage market (denominated in Swiss francs) blows up, Swiss banks go boom.  They do not pass go and they won't be around to collect the $200.

No monopoly here...

Mon, 05/24/2010 - 16:48 | 370894 ConfederateH
ConfederateH's picture

Those eastern European mortgages, although priced in Francs, where not made by Swiss banks.  Perhaps the defaults will take down the Swiss banks, but that is after they have already taken down the Austrian and Hungarian banks.

Mon, 05/24/2010 - 12:13 | 370195 primefool
primefool's picture

The SNB has unlimited power to issue CHF to its banks if needed. However it is possible that the banks really need EUR to fill the holes blown in their balance sheets. So SNB goes out and buys a ton of EUR - I read somewhere that they have accumulated quite a stash of EUR through intervention. So now they can provide quite a bit of Euros to their banks to plug the holes.

Mon, 05/24/2010 - 12:19 | 370216 Coldcall
Coldcall's picture

if they need euros so badly why would they be buying them now when chances are they can buy them in a couple months far cheaper?

Mon, 05/24/2010 - 12:27 | 370244 primefool
primefool's picture

There has been a flood of europeans moving their euros into swiss francs - so they need to do something now. They can always do more later too. These central banks dont need to worry about "profits" - since they can create unlimited CHF at no cost ( as Bernanke has often pointed out). So they dont think like you and me - about buying things cheaply or not - they dont care.

Mon, 05/24/2010 - 12:18 | 370211 barthezz
barthezz's picture

is there a bloomie command or link where i can 'reproduce' the above charts?

Mon, 05/24/2010 - 14:39 | 370603 CorrelationTrader
CorrelationTrader's picture

barthezz just copy the bloomberg data into excel from the LIBOR page. If in doubt just press help help... GL.

Mon, 05/24/2010 - 14:51 | 370626 HellZero
HellZero's picture

No one uses EUR Libor as a reference rate. Euribor yes, Libor no. Its honestly not worth talking/thinking about.

 

The guy setting libors at UBS London is probably sat at his desk reading ZH wondering how to get famous.

Mon, 05/24/2010 - 15:51 | 370736 Bruce Krasting
Bruce Krasting's picture

Zero Hedge had a piece last week that discussed capital flight out of EU banks to Switzerland. The info came from Paribas. I think that is continuing on a daily basis. This nervous money is sitting in an Italian, Spanish (etal) banks.

The risk to a big depositor is as high today at it was in 2008. UBS is a safe a place to weather a storm.

The money flow has been coming to UBS by the billions. Some of it stays in Euros, a portion gets converted to CHF. Either way UBS ends up with tons of short term deposits. They know this money is "hot' and will likely go back home if things settle down, so UBS puts it on the short-term E-libor market. Maybe that is why they look like a cheap lender.

*All quiet on the FX front. A logical move down in the Euro today following last weeks silliness. No indication of CBs. I think the pressure builds at E/$ 1.22 and E/CHF at 1.4050. When we see those again, the Vix will be bid.

 

 

Mon, 05/24/2010 - 16:56 | 370909 ConfederateH
ConfederateH's picture

Well said Bruce, I was thinking the same thing.  UBS and CS are being flooded with money from the Meds and also Northern Europe.  These deposits are sitting in cash.  UBS wants to earn something off of it, but this is hot money that could disappear as quickly as it appeared.  The Libor market is probably the safest place UBS could find to make at least some kind of profit from this instability.   UBS had positive "net new money" inflows for the first time in a couple of years last quarter.  Also, the Swiss construction industry has been going crazy building eigentumwohnungen and maisonettewohnungen on the back of under 1% Libor hypothekes.  A lot of these "condos" are being picked up by wealthy europeans desperate for a sage haven.

Mon, 05/24/2010 - 21:37 | 371295 laosuwan
laosuwan's picture

i dont understand why, with all this money pouring into switzerland, the franc is not appreciating.

 

Long term, fundamentals, where do you see the franc headed?

Tue, 05/25/2010 - 01:11 | 371434 ConfederateH
ConfederateH's picture

The Swiss Franc recently scraped 1.40 to the Euro, an all time high.  It has already appreciated massively to the Euro.  Switzerland is being forced to partake in the race to the bottom with currency debasement.  The longer this slow train wreck goes on, the worse it is for Switzlerland and many other financially prudent countries like Norway too.

Mon, 05/24/2010 - 18:37 | 371064 weelp
weelp's picture

I wish I understood how the fuck LIBOR worked in the currency markets. WTF. Can someone explain this to me like I'm a 5 year old? I know its a benchmark interest rate, but what does that have to do with all this? 

Tue, 05/25/2010 - 02:05 | 371461 fl3tch3r
fl3tch3r's picture

Anyone know of any links to a detailed analysis and / or solvency risks for UBS & CS, based on their most recent reporting?

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