This page has been archived and commenting is disabled.

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

testosteronepit's picture




 

Wolf Richter   www.testosteronepit.com

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.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 05/31/2012 - 07:26 | 2478667 Ratscam
Ratscam's picture

UBS and CS were forced to reveal all counterparties that traded US securities in the week of 911.

Wed, 05/30/2012 - 16:09 | 2477103 Ratscam
Ratscam's picture

yap, all gone down the drain a longtime ago. Think of Singapor, Guernsey, Cayman etc. Capital controls, hmm.... reminds me of July 1931, Mr. Boering in Germany. Can the Swiss please put the SNB policies up for a vote!

Wed, 05/30/2012 - 14:34 | 2476686 Money 4 Nothing
Money 4 Nothing's picture

Switzerland to get on the radar for liberatin, build a nuke reactor for energy and stop accepting the USD. NATO fly over required.

Wed, 05/30/2012 - 13:59 | 2476519 batz
batz's picture

 

One hopes Switzerland can defend itself from modern military forces. There appear to be a number of governments around the world who believe the gold in Swiss vaults belongs to them.

The Afghanis seem to be able to hold territory fairly well. We don't have to civilize them, but maybe we should build a banking system there?

Wed, 05/30/2012 - 13:47 | 2476441 Money 4 Nothing
Money 4 Nothing's picture

Serious OT question... So as a Country, say Switzerland you can't keep taking other currencies or assets for FX swaps into the Franc? Is that bad?

TIA

 

Wed, 05/30/2012 - 13:25 | 2476368 Piranhanoia
Piranhanoia's picture

Ah, the Swiss, I mean, Schweiz, sorry, Suisse,  no, Svizzera;   "We are here to protect our money for you"

Thu, 05/31/2012 - 08:11 | 2478724 Ar-Pharazôn
Ar-Pharazôn's picture

wrong mate. we are here to protect YOUR money from YOURSELVES

 

;););)

Wed, 05/30/2012 - 19:18 | 2477682 The Alarmist
The Alarmist's picture

Years ago, I brought one of those Gold-Bar shaped boxes of chocolate to one of my colleagues in NYC, and he said, "Ah, you brought me some of my peoples' gold."

 

Wed, 05/30/2012 - 13:22 | 2476355 Fox Moulder
Fox Moulder's picture

The old Swiss Vice Grip.

 

(It's vise.)

Wed, 05/30/2012 - 13:47 | 2476453 Antidisestablis...
Antidisestablishmentarianismist's picture

No, in this case it is definitely "caught in a vice".  You don't suppose it is a virtue, do you?

Wed, 05/30/2012 - 15:08 | 2476861 LFMayor
LFMayor's picture

Vice/Vise.  I think he failed shop class and shot his ceramic elephant table light with a flare pistol, just like Anthony Michael Hall did.

Do NOT follow this link or you will be banned from the site!