Bracing for a Euro Crash and Creating A Housing Bubble: The Swiss Caught in a Vice

Wolf Richter's picture

Wolf Richter

As developments in the Eurozone veered from bad to awful, with Greece on the brink and Spain getting closer, Switzerland, a speck of land with 7.9 million people surrounded by Eurozone turmoil, has been bracing itself, according to the President of the Swiss National Bank and long-time euro-skeptic Thomas Jordan, for the collapse of the euro.

"We start with the thought that Greece will not exit the Eurozone," he said in an interview in the Sonntagszeitung, and then came the but—actually a whole slew of them.

"Our baseline scenario anticipates a protracted period of great difficulties," he said. "The situation will only calm down when budget cutting and reform efforts start working in the Eurozone, which could be a long time. We're preparing for very turbulent times." And Greece's exit, he said, "can't be excluded”—thus following in the footsteps of Jens Weidmann, President of the German Bundesbank, who’d ventured into a veritable lion’s den with a pungent interview in Le Monde. Read.... The President of the Bundesbank Lashes Out.

And even if Greece remained in the Eurozone, “contagion could spread to other countries and escalate the debt crisis." Less worried about trade and banking relationships with Greece, he saw the greatest dangers in the indirect consequences: “It’s conceivable that the entire European banking system gets into trouble. It would pull down the economy of Europe. Other highly indebted countries could get in trouble as well. That would pose high risks for us."

But there was a flicker of hope, of sorts. "It's possible that Greece's exit has a positive effect on other countries in that the problem would be isolated.” And then the bad news: “But the opposite could also happen, namely a signal to the markets that other countries will follow Greece." And Greece's exit still wouldn't stop the flow of bailout billions because otherwise "Greece may go into free-fall."

In 1993, years before the euro became an actual currency, he wrote in his dissertation that a European monetary union would be very crisis-prone, and that only a few countries would have the strength to stay in it. His "skeptical prognosis" was based on "economic analysis and healthy common sense," he explained—and this, after common sense had long been banished by central bankers and economists.

So, was the euro a mistake?

Um— “My dissertation ... pointed at the problem of imbalances in terms of debt and deficits within the Eurozone. Now we see that the Eurozone hasn't worked as desired for exactly these reasons." And then Jordan added an even darker perspective: "The debt problem doesn't only exist in Europe. The US and Japan also...."

Already last December it filtered out that the Swiss government was preparing for a collapse of the euro. Finance Minister Eveline Widmer-Schlumpf told parliament back then that a task force was studying the imposition of capital controls and negative interest rates to protect Switzerland from the capital flight that a euro collapse would engender. A tidal wave of euros would drive up the Swiss franc, devastate Switzerland’s export economy, and devalue its vast wealth invested in other countries.

Jordan, as member of that task force, confirmed: “We have to be prepared that the monetary union collapses." Specifically, they were working on capital controls and other measures to limit “the influx of capital into Switzerland.” And the details? “I can't go into details," he said.

He lamented that the situation had become “worse and much more uncertain” over the last few weeks: “The euro is at its lowest level against the dollar since January 2010. We're watching the upward pressure on the franc. Investors are looking for a safe haven.”

And a tax haven: the German Ministry of Finance estimated that Germans have up to CHF 360 billion ($374 billion) in Switzerland—110% of GDP! Just Germans. But it’s worldwide phenomenon! Half of it came from institutions and half from private investors, including as much as $100 billion in "black money," a quarter of which may have been transferred by now out of Switzerland "to supposedly safer investment locations" due to the growing risks of being discovered. Capital flight has made Switzerland rich, but now it threatens the real economy.

In August, the SNB had instituted a floor of CHF 1.20 to the EUR and had sworn up and down to defend it by printing unlimited amounts of francs to acquire unlimited amounts of euros, a potential fiasco if the euro were to collapse. Jordan swore once again that the SNB would maintain the minimum exchange rate and that interest rates would “remain at zero for the time being.”

“But there’s a housing bubble,” he said. And and a dangerous conundrum: "In considering the threats facing Switzerland, we concluded that the focus must remain on the minimum exchange rate. As a consequence, interest rates are at zero, and so we have enormously expansionary conditions."

How dangerous?

"It gives me stomach aches. Especially with condos, we have price developments in many regions that are clearly exaggerated. And it looks more and more like a bubble. Mortgages have been growing for years faster than the economy as a whole. That's highly unhealthy. They create imbalances that over time have a negative impact on financial stability and the construction sector.” He cited the US, Spain, and Great Britain. “The dangers are now greater than many want to believe," he said. If the bubble were to continue, Switzerland "would have a home-made crisis in which a lot of capital would be destroyed, and many jobs in finance, construction, and real estate would be in jeopardy."

And this from the guy who in 1993 used economic analysis and healthy common sense to predict the travails of the euro before the euro was even born. Alas, the SNB, hands tied to zero interest rates, is helpless and cannot react to the housing bubble, he said. It can warn but not intervene.

And so, as the Swiss have joined the currency race to the bottom, economies retrench. Populist and nationalist movements sweeping the world threaten ... China, globalization’s biggest winner. Read.... Death Of Globalization Will Shatter China.

And on his way back from Zurich, contrarian speculator Doug Casey had a run-in with US Immigrations and Customs, and here is a video of his farcical, funny, and disturbing experience.

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Gimp's picture

The entire economy is full of holes...

VelvetHog's picture

Welcome to the World Pozi where the richest get richester.  But don't worrier furtherer because all of this new-found wealth is directly at the expense of the other 99.9% of us.  Matrix indeed.

NewWorldOrange's picture

Well at least one POOR guy is fast growing rich off these fucks:

Been short EUR/USD for nearly a month, as well as NZD/USD and AUD/USD. Scaled in for two weeks. ALL IN NOW. Do or die. Thanks Tyler. The incessant "gloom and doom" on Europe definitely encouraged me. I owe you buddy;:


Sun, 05/06/2012 - 17:37 | 2401652 NewWorldOrange "It's going to be a very interesting summer."

Yes indeed it is. Perhaps even better than last summer (for currency traders.)

As for this evening, I think AUD/USD and/or NZD/USD are better shorts than EUR/USD. Always great "risk off" trades, especially on a Sunday evening after such a weekend. Whether the markets perceive increased volatility much in part due to the Europe elections, a decline in global markets, or are still just pricing in the Friday's jobs report, there is likely to be a flight to the "safety of the US dollar" (yeah, I know - LMAO too) and when that happens the Aussie and Kiwi usually take a real beating. Especially if commodities markets are trending down as they have been.

Shorted both and EUR/USD Friday afternoon. Just closed EUR/USD. Just added BIG to my already sizeable shorts on AUD/USD and NZD/USD. I'll either wake up with a huge profit or most of my earnings from the past two months wiped out. Because sometimes you just gotta' go for the gusto.

[UPDATE 5-30-12: I got back in EUR/USD shorts the next week...closed my AUD NZD shorts last week...still in the EUR/USD short and in fact just went all in on that with a target of 1.21...}

(I think I'm allowed to gloat a bit especially after the past few days, heh. I'M RICH BITCHES!)

forrestdweller's picture

don't worry about switzerland, the last country you shuld worry about.

healthy economie, healthy financials. soms insolvent international banks, but the real wealth is not there.

kevinearick's picture

running on auto...

Buck Johnson's picture

Switzerland is damned if they do and damned if they don't.  But they never though the EU economy would implode.

Ar-Pharazôn's picture

strange thing i am swiss and i believed since the begin that the EU would collapse....

Tic tock's picture

I thought the wiss were pretty much self-contained anyway, what, are we talking about the export of milk? ...after the CAP, the idea of trade-imbalance seems somehow academic. Meanwhile, the value of the swiss' wealth is being rapidly eroded!! - i wonder whether this will o down in hiostory as the silliest policy ever to come out of a central bank?

JohnKozac's picture

"...And it looks more and more like a bubble. Mortgages have been growing for years faster than the economy as a whole. That's highly unhealthy. They create imbalances that over time have a negative impact on financial stability..."

Really? So why did banks (globally) lend moey to borrwers who could never pay it back?

Umh's picture

You mean besides the fact that everyone else was doing it and seemed to be getting away with it.

flight77's picture

And than we take a look at the ballance sheets of UBS and Credit Suisse!!
If Switzerland fails, we have the 100% proof, that Bankers lack, or better, have  leaking brains.
The Swiss state is run by Bankers for Bankers, and the result will be a bankrupt Country.
There is so much money in Switzerland, but may that fact won´t prevent a collapse.
I am in regular contact with a former swiss broker. He is painting already for some years a very bleak scenario for Swiss Macros, esspecially in respect to CS and UBS.

Ratscam's picture

come on UBS and CS only have a balance sheet that represents 500% of the Swiss GDP. That's what I call conservative Swiss banking practice.

When they supported the TBTF UBS they should have required them to give up their investment banking division. Now they are FUBAR.

George Orwell's picture

I live in Switzerland.   I can confirm the housing bubble here.  A lot of apartment blocks were built for rent and they are sitting empty.  Rents are coming down.  Near zero interest rate means that the builders can roll over the loans pretty easily, so the bubble has not burst yet.  But something has got to give.  You can't keep rollover over construction loans like that forever.



Ar-Pharazôn's picture

if you really live here you got to be blind mate. where i live (Ticino) we're plenty of russians coming to live here. dont know about zh but i think it's probably the same

justinius1969's picture

I concur.... 100 year mortgages in this bubble country. Where have we seen that before..

Ratscam's picture

i.e. Japan after the 1989 bubble.
multigenerational mortgages. Since WWII a standard in switzerland, because the bankers lobbied a law where you have to pay tax on the potential income of your property, only to be deducted by the interest payments on your mortgage. Smart, aint they?

Ratscam's picture

check for the huge amount of appartments that are on the market. 2009 that figure was 70% less. Ok they are still complaining in Zurich about their 2012 vacancy rate of 0.5%.

I don't see a housing bubble rather a sideway movement until

1) interest rates rise

2) Foreigners stop immigrating into CH

3) SHTF scenario in EU, JPY, GB or US then all cards are off

Sockeye's picture

Sounds like Canada.

Zero Govt's picture

it pains/tires me to hear so-called 'experts' like the head of the Swiss Bank claim the problem with the Euro currency is trade imbalances and competitveness ...if that were so then the US Dollar would be imploding right now due to the equally big imbalances between various US States

the real problem is DEBT, way too much of it

being able to devalue your currency (ie. cheat) brings nothing to the table and but brief relief from a debt deflation/implosion. When you're overloaded with debt devaluing your currency is not going to save you (ask Zimbabwe, Argentina, Weimar Germany)

once you're a cooked goose baked in debt you're stuffed. Game Over.

I trust Thomas Jordan will be attending the village idiots competition in Davos on home turf in Switzerland this year to impart his 'wisdom' on his industry that along with politicians have raped and ransacked nearly every country on the planet many times over and are up to the same anarchy again

what's his advise for them taking responsibility and being held to account for the national destruction, clawbacks on all bankers bonuses (and politicians wages) and doing some time behind bars???

we wouldn't want to interrupt him sipping his tea and talking casually about 'the problem' as millions of people become destitute

Marco's picture

The US is a transfer union, the Federal government shuffles federal tax money around to fund the trade imbalances without debt ... that's why it works for the US. In the EU the only way to fund a trade imbalance is debt.

Trade imbalances hollow out the competitiveness of the trade deficit nations, create a financial elite in the trade surplus nations ... and create a lot of debt. In my opinion debt is a symptom and allowing the financial crowd to foster trade imbalances is the problem (something they have been able to do even under the gold standard in the past).

Keynes had it exactly right.

Zero Govt's picture

Govt does not 'balance' trade imbalances, neither in the US or Europe

Govt funds with debt its budget deficits only

it is not balancing trade

the US Govt doesn't even know what the trade balance is State to State or across its national borders, let alone have the brains to balance it! Ditto the EU

Keynes was a Govt consultant (crone) he was paid to get everything wrong. He was also a self-taught economist, economists have been completely wrong about everything since they were invented just as the statistical fantasy, the average man, is a load of tosh

Japans (manufacturing) trade surpluses did not contribute to their massive (banking anf finance) debt levels. Ditto Germany who also has very large debts but also very large trade surpluses

You can have trade surpluses and have low debt or high debt. You can have trade losses and have high or low debt levels. Trade sorts itself out, it is not connected to debt levels in Govt or the economy.

Tim Geithner can barely balance his budget, can barely fill out a tax form, let alone balance trade!!!

The correlation is not linear and is bollocks

Marco's picture

I didn't say the US government was balancing trade, I said it transferred money to the trade deficit states to fund their trade deficits with other US states (through welfare for instance, the trade deficit states have more people on food stamps).

In "normal" situations trade deficit and current account deficits go hand in hand ... and current account deficits can only be funded through external debt, selling your economy out to foreigners (which most nations don't do) or reducing your foreign reserves.

It's almost impossible for a nation to accumulate debt to foreigners with a consistent trade surplus ... for instance, if you take Japanese monetary obligations in aggregate (ie. private + sovereign) they were a net creditor to the rest of the world. They had massive sovereign debt, but they were not a debtor to the rest of the world.

This is why ultimately Japan's sovereign debt pre-Tsunami was sustainable ... and why Greece's is not. Japan was not dependent on foreign largesse before (and though they are now they still have a lot of foreign reserves to tide them over), Greece is ... as is the US.

In the end when a country runs a trade balance and has it's own currency it always has the option to fuck around with that currency (and the internal debt) without changing the slightest thing about one important fact ... they can trade for all they need. When you have a trade deficit you are always at the mercy of others.

malek's picture

Not sure why you are attacking him

"My dissertation ... pointed at the problem of imbalances in terms of debt and deficits within the Eurozone."

Zero Govt's picture

because it's not the IMBALANCES that are a problem for the €euro just as the debts of California against the balanced budgets of Idaho are not a cause of stress on the US Dollar

the debt is the beginning and end of the problem with debt, not the €euro currency or trade surpluses (you cannot devalue your way out of a trade imbalance, a 95% devaluation in the US Dollar over the past 80 years has not caused a miracle turnaround in US industry)

the trigger point for Greek imploding is the debt

the trigger point for the Euro folding will be different, probably enitirely political

franzpick's picture

Yes, the trigger point for the Euro folding may not come until the German public finally votes for their "Nein-Nein-Nein" plan.

falak pema's picture

the vice goes beyond Schweizer land, its a piece of shit for world capitalism, Casino Royal! 

cathrynm's picture

Greece should just default.  Trigger the dreaded 'credit event.'  Then what happens is either the system can handle it, all those contracts pay off and everyone survives and then the system starts growing again -- or the whole thing explodes, massive runs on all banks worldwide, etc.  Either way, it ends the uncertainty and we can all move on.

brooklynlou's picture

In full Mr. Panos accent ...

"Why should Greece default when we get the Schnitzel monkeys to surrender first."
"No, no, no Mr. Schnitzelface. Greeks SAVE Europe, Germans DESTROY Europe."
"We will blink last. Why, because we are yeeniuses, thats why"

AnAnonymous's picture

US citizens are by far the biggest winners of globalization.

Completely a different league. Globalization reaped benefits, there are US citizens and the others.

The Alarmist's picture

Hey, Charlie.  The correct phrasing is 

"There are others, and then there is myself."  

The thing about US citizenism is that we still think we are freeborn individuals.

lakecity55's picture

Ben, it's you, right?

Trying that new Fed propaganda machine?

Vendetta's picture

"US citizens are by far the biggest winners of globalization"

Wrong.  Perhaps a sliver of the population but for most it has been nothing but economic disaster.  $2 waffle irons mean nothing.

Matt's picture

They have their iThings and goods from all over the world. What productive thing is there for them to do?

around 1% of the US population produces enough food to feed what, 2 billion people?

between china and domestic manufacturing, you have all you need. All that is left for the remaining ~90% of the workforce are service jobs.

Sure, we could go neo-luddite, stop importing stuff and stop using automation and computers, just to create work for people, but why?

If you stop with having so many people in the military, so many people making stuff for the military, and stop building more homes when there is a surplus, you would have even higher unemployment.

So what do you think the solution is?

Gavrikon's picture

What the hell is Luddite abput ceasing to import cheap labor and to export factories and tech jobs?

Matt's picture

The jobs are all disappearing anyways. hundreds of thousands of chinese working on iStuff will be replaced with robots over the next several years.

LFMayor's picture

Hey... don't get caught looking at websites that you're not authorized to view, just like that last guy!   Your chair was still warm when they told you to sit down and start posting here, wasn't it?

That previous AnAnon has gone to join his ancestors.

forrestdweller's picture

as long as the swiss keep their banking secret, foreign money will flow in, and they will stay rich.

there is still unbelievable wealth in this country.

and you can conquer it by military force, but you can't keep it. they are not people to be conquered.

malek's picture

You still believe there is any banking secrecy left in Switzerland?

forrestdweller's picture

yes, there is the swiss banking secrecy. there is an unbelievable amount of wealth packed in the swiss banks, just to avoid taxes.

for an example, check liechtenstein, the small province of switzerland.

lots of tax-refugees there.

Overflow-admin's picture

Liechtenstein is NOT a province of Switzerland! But you might want to check Zoug, Luzern, Appenzel (or any eastern canton by extent) for the unbelievable amount of wealth packed in the swiss banks.

**Fixed for you**

Ar-Pharazôn's picture

mate................. Liechtenstein is not a swiss province........................................................................

forrestdweller's picture

true, officially, it is not. but is has the swiss frank, the same german dialect, it has open borders with switzerland, and the economy is completely fused with the swiss economy.

but formally you are right.


Overflow-admin's picture

New World Order doesn't recognize borders and states ^^

malek's picture

You might to check your sources. Many people believe there is still Swiss banking secrecy, because simple tax evasion by omission on your tax report is not a crime in Switzerland (only a misdemeanor), so foreign agencies cannot demand your account information based on accusation of tax evasion in that foreign country.

However those foreign agencies can easily come up with other accusations, the favorite most likely beind "money laundering" to receive that information - the Swiss authorities will not likely reject such a request.

forrestdweller's picture

the UBS has given a few names to the US authorities, some discs with names of german clients have been found, but that's about all. there is pressure, but the swiss will never give up their banking secrecy. it is on of the fundaments of their wealth. if the pressure increases, they will organise a referendum and the people will say 'no'.

another source of wealth in switzerland is all the ultrarich who have become a swiss resident, to avoid paying taxes on their assets.

malek's picture

I have laid it out how it was undermined.

You are just stating that you're still believing Swiss banking secrecy is sound. Good luck with that!