Swiss Notes

On Changing Repo Haircuts

This week the Swiss National Bank announced publicly (FTalfaville link)
that it has excluded Irish government bonds from being elligable as
collateral for its repo operations. They did the same thing for
sovereign bonds of Greece and Portugal. For the Swiss to start off the
New Year with this offensive move is worthy of note. Did the Swiss slap
their neighbors in the face?

SNB officials (with the assistance of both CNBC and WSJ) did their best to downplay the significance of these actions. From the Journal:

A spokesman for the SNB said, “Only securities that fulfill stringent requirements with regard to credit rating and liquidity are accepted as collateral by the National Bank."

And that is correct. Generally speaking the SNB requires collateral with
a AA- minus rating. The recent downgrades for Ireland, Portugal and
Greece “necessitated” the actions by the SNB. This was "no big deal" as
they were only following longstanding and pre-existing rules. I don’t buy that. From Risk.net:

The SNB states that "securities issued by sovereign countries and central banks can be exempted from this rating requirement". A spokesperson for the SNB declined to comment on the specifics of the Irish case.

So the SNB didn’t have to do this, they chose
to do it. That is a slap in the face that leaves a mark. In the scheme
of things this is not a big deal. The repo market for peripheral
sovereign bonds is still open. More a hiccup than an issue. But I am
left wondering “why now?” At the SNB every action is taken after significant deliberation.

Bad Press for SNB

The Neu Zuricher Zeitung had an interesting article today.
I consider the NZZ as the official organ of the SNB. The relationship
is not unlike that which exists between the WSJ and the Fed. An article
that is critical of the SNB is rare, and noteworthy.

The concentration risk of the SNB

High loss in 2010 eats dividend reserves

The exchange rate losses of the Swiss National Bank on their foreign currencies for 2010 should amount to around 30 billion francs. In politics, the foreign exchange purchases by the central bank will be extremely controversial.

30b CHF is a big deal to the SNB. As the article discusses, there are
already political (and economic) issues that are arising as a result of
SNB reserve management policy mistakes. The SNB has recently referred to
the decision to acquire tens of billions of Euros in an effort weaken
the Franc as, “with the benefit of hindsight….” In other words, they have acknowledged that they have erred.

The forgoing reconfirms an important point. The Swiss National Bank is out of the market. We are entering new uncharted waters on the CHF crosses. And the captains of the ship can’t use the steering wheel.

Switzerland attacks Ireland?

The following is a look at Swiss financial institutions portfolio
holdings from a year ago. The one number that looks large to me in
comparison is Ireland. Irish holdings are 3X’s that of nearby Italy.
Surprising. 2X’s that of Spain. (Spain’s economy is seven times larger
than that of Ireland). Norway’s economy is twice that of Ireland yet the
Swiss held 4X’s as much paper. You get the picture.

The actual SNB announcement of the changes of Repo haircuts for Ireland was back on 12/21. The question I’m wondering about is when
did all of those Swiss institutions that were holding these big slugs
of Irish paper first hear about the upcoming changes in the Repo regs? Was it a day before? A week? A month?

I think the answer is at least a month. The SNB would give
the big hometown institutions a heads up so that they could prepare in
advance for the coming changes. What does that mean in real terms? That
means that Swiss Inc. lightened its books on Irish exposure during the
month of November.

Of course it was November that broke the back of the Irish bond market
and forced a $120 billion bailout. Call me an old cynic. But I never,
ever believe in coincidences. These dots are connected.

Comments

[DoChenRollingBearing]

Thanks Bruce, great column as usual.

Keeping an eye on Europe is important.  I have asked Sudden Debt to help out with more reporting from Europe.