SNB in a Pickle

Bruce Krasting's picture


An absolutely wonderful story came out today. The issue is the Swiss National Bank (SNB), its policy of pegging the Swiss Franc to the Euro at 1.200 and the huge reserve increase this has caused. More broadly, this is a story of Central Banks, their inventions in the markets, and the negative blow back results that these interventions cause.


This matter has been discussed in a number of newspapers/emags:


1) FTAlphaville

2) Telegraph

3) NZZ

4) WSJ


A quick summary of this fast moving story:


Standard and Poors (S&P) came out with a paper that said that the SNB had bought Euro 80Bn of core EU country bonds the past few months. S&P went on to blame the SNB for the unusual activity in the EU bond market that followed. Two-year debt instruments of Germany, Austria, Netherland and Finland went into negative territory. At the same time, bonds in Italy and Spain tanked. S&P flat out point the finger at the SNB:


SNB bond-buying is "exacerbating" the gap between borrowing costs for stable countries like Germany and the rest of the 17-nation euro zone.


Some perspective on this. What is the largest single economic threat the globe faces today? The clear answer is the funding market in the EU. Extraordinary steps have been taken by the ECB to contain the problems. More extraordinary measures are being introduced over the next few months. In spite of all that has been done, it is by no means clear that the problems can be contained. If they are not contained, the global economy is headed into a very nasty spell. And the Swiss National Bank is adding to the problem. According to S&P, its actions are directly undermining the entire global financial system.


In an extremely unusual move, the SNB fired off a response to the S&P report within hours of it being issued. Not surprisingly, the SNB denied all of the accusations by S&P:






I think this was a very dumb move by the SNB. By issuing a denial, it has opened the door. I (and dozens of others) are all going to cry:


“Prove It!”


The SNB does not break out its bond holdings. The numbers are bunched with central bank deposits. At this point no one knows if S&P is right in its assertions about the SNB bond portfolio. But that doesn’t really matter. If the SNB was loading up on deposits at the Bundesbank, it had the same consequence as direct purchases of government debt; it drove interest rates down. In this case rates went below zero in Germany while they soared in Spain.


The S&P report is an accusation that the SNB facilitated capital flight from the periphery to the core. By its actions, the SNB exasperated the problems. This is a very serious charge. I don’t think we have heard the last of this. The SNB has to step-up and prove that it is not contributing to the monetary problems in the EU. A formal announcement has to follow. Information has to be provided that attempts to blunt the S&P accusations. I believe that another SNB response is likely, as S&P has called its bluff. After the SNB refuted the information, S&P quickly came out with a response that they were standing by its numbers:


We stand by the conclusions of our report. We believe the assumptions underpinning our analysis are reasonable.


I don’t think the SNB can prove what it wants to prove. I think the evidence will show that the SNB absorbed huge amounts of capital flight from the south, and then passed it along to the north.


There is a lot at stake here. The conclusion from the SNB affair is that Central Bank policy in one country has negative consequences to other countries. This is an old story. But this time the EU is faced with a big problem with Switzerland. They are going to the mats to save the Euro, and the Swiss are scrambling their eggs. Something has to give.


The solution is simple. When the SNB gets another E10Bn from Spain or Italy, they have to put the money back into the bond markets of the countries where the money came from. That would address the EU complaints that will be forthcoming. Of course, that would put the SNB in a pickle. I don’t think the SNB (or the Swiss people) is willing to buy Spanish sovereign debt. The “Peg” policy would have to come into question under these circumstances. I don’t think the Swiss will fund Spain.




I have one gripe with the S&P report. It said that the issue with the SNB was “unnoticed”:


Largely unnoticed, Switzerland’s decision to stem the appreciation of the Swiss franc has led to a de facto recycling of funds from the eurozone periphery to its core, via the Swiss National Bank (SNB).



Unnoticed you say? I said exactly what S&P said today way back on August 7: (Link)


The SNB invests its hoard of Euro reserves in short-term German government paper. They have avoided holding their reserves in debt instruments of Italy and Spain. This has influenced market rates in Germany; two-year yields have been at or below zero for months as a result of the Swiss. This has mucked up the European bond markets as it results in a huge spread between German and Spanish yields. The Swiss intervention is adding to the stress in Euro funding markets.


Izabella Kaminska, at FTAlphaville, said much the same on September 7. (Link)


You can’t get no respect.



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Ar-Pharazôn's picture

Bruce what are you doing? trying to make Switzerland pass for the bad guy while you british do even worse things?


at least we didnt kill milions of people all over the world to spread "civilization"

falak pema's picture

the euro pot is simmering on all sides; and its every man for himself, behind the Brussels curtain of "one for all, all for one".

Brussels sprouts and Zurich gnomes. Where global traders and HF money men roam like in ancient Papal Rome of Lansquenet (landsknechts) Renaissance doom. 

Mediocritas's picture

I don't see the SNB as the bad guy here, I see it as pragmatic.

The source of Europe's problems is yield convergence brought on by the Euro plus what I call "credit Schengen". Borrowing conditions equalized across borders without an appropriate equalization of fiscal policy creating a potential difference that eventually broke down with a spectacular snap.

Brussels thought it could use the euro to enforce fiscal convergence yet to do so first requires social and cultural convergence, (something that is extremely difficult in Europe given the history of the place, the tribal nature of Europeans and the multiple languages spoken). Brussels put the cart before the horse and if it continues with this pig-headed and utterly wrong strategy then it will push Europe into another war, first between classes, and then, in the populist response, between nations.

What we see now (divergent yields) is a good thing. It indicates proper price discovery, with yields reflecting the true state of national management. Should the PIIGS be able to borrow at the same rate as Germany? Hell no, yet this is what the ECB wants and is the ambition of that abomination known as the eurobond. Brussels refuses to accept reality and is allowing the ECB to take the heat off yield divergence via abuse of the TARGET2 system as it clings to a broken dream. The Swiss are correctly seeing the system for what it is and are playing safe by sticking with the core.

The SNB likely sees the same thing that I (and others) see, that the euro project got ahead of itself and if the project wants to continue moving forwards then it needs to first take a few steps backwards, admit that mistakes were made, correct them and then move on. What this means is excising those nations that simply aren't ready to be part of the euro. It's entirely reasonable for the Swiss to avoid Italy and Greece.

I would take it a step further and suggest backing down almost completely from the euro project by elevating it to an SDR-like status and reverting each nation back to its prior currency. The Euro would then, like an SDR, reflect a weighted basket of member currencies within the European Union and would be used for international trade with Europe. The ECB could then apply the meddling it craves by adjusting percentages in the basket, (the way the IMF always dreamed of doing), although I'm sure we'd all be better off if the IMFs and ECBs of this world just backed away and stopped screwing things up. Europeans are already used to seeing two prices quoted for goods and services, they went through it in the transition to the euro and many nations still dual-quote. Another currency switch is nothing new for Europeans and isn't the nightmare Brussels paint it to be at all. For many it would be a sigh of relief.

In a region with sovereign borders and highly diverged cultures, a single currency was always a stupid idea. Arguably the experiment could have worked if yields had never converged but they did and the rest is history. As is always the way in the aftermath of a failed philosophy, there are always fools who cling to the dream.

Ghordius's picture

you start with arguments I can agree with re the SNB but then you get into strange views on europe, particularly regarding it's two confederative "clubs", the EU and the EZ

"Brussels" has very little to do with the EUR. The EU (27 nations) had a Council Meeting last year where the proposal of using Brussels facilities for EUR-related matters was vetoed down by PM Cameron on behalf of the UK.

The HQ of the EuroZone (17 nation's central banks) is in Frankfurt. The governing council's votes are those of the governors of the national banks.

Further, you go into the SDR "matter". Please remember that it's the Chinese that are championing SDR's, followed by the other BRICS.

And why should trade (of which a common fiat currency is a currently used as a unit of account) be a problem in a "region with sovereign borders and highly diverged cultures"? The key issue is still around governmental deficit spendings and how to finance them. We would have the same issues if gold would be both the unit of account and currency of trade - a single currency that was used for centuries. Except if you are angling for the "competitiveness" discussion, which is a different one altogether.

Please don't put the IMF (or it's "sister" the World Bank) and the ECB in the same basket, they are fundamentally different in their functions.

Nevertheless, IMO some of your views on the possible "use of the EUR as a kind of intra-european SDR" are correct, though I doubt we'll reach that scenario.

I particularly agree with you on this "What we see now (divergent yields) is a good thing. It indicates proper price discovery, with yields reflecting the true state of national management". It was the bankster-propagandized "all european debt is equal" that was wrong, from a market perspective.

Mediocritas's picture

Fair comments. I appreciate a calm review and I did not downvote you.

On BRICs championing SDRs, I don't think they are being unreasonable although I would hesitate to use the word "championing". I prefer "compromising". These nations dislike SDRs for the same reason as the US and for the same reason that I do: SDRs represent centralization of power to untrustworthy hands and a challenge to sovereignty in a world that is not ready for one government (and never will be while we retain our genomes). A BRIC push for SDRs, if truly honest and well intentioned (which I doubt), is a compromise and provides a soft option for the USA, should the USA decide to embrace the reality of market forces (which I doubt it will).

Push for SDRs from the BRICs represents the reality of waning US dominance. The primary reason that the US dollar retains the international power that it does is due to the might of the US military being parked around oil reserves. While this remains true, the US dollar has a valid claim as a petro-dollar. Meanwhile, erosion of "organic" economic strength in the USA since 1980 means that the former fallback of a claim on US productivity is now gone (it was exported to China) and little backing for eurodollars remains should Middle East dominance be lost. A major military defeat over oil would rapidly lead to US hyperinflation in a panicky eurodollar repatriation. Granted, that's an extreme and unlikely outcome, but US dollar demotion is ultimately inevitable without a sustained US economic recovery as the US will not be able to afford its military.

SDRs represent a "soft option" for US dollar demotion. BRIC currencies can be added to the SDR basket (along with others) and the US dollar component gradually wound back to result in slowly delivered inflation for the USA rather than a sudden inflationary shock. I believe it to be a rational compromise suggested by ascendent BRICs and may, in fact, be the best current option for the USA.

Certainly, China has already demonstrated that it is not bluffing and won't wait around for the USA to face reality. Should US economic health continue to decline, then China and others in pursuit of reduced risk exposure will simply force the matter through bilateral currency agreements as has already been the trend (for example: ). The longer America attempts to cling to currency dominance with little more than a threat of violence to justify it, then the greater the inflationary shock when natural forces ultimately break through (and they always do in the end). Like the SNB, the BRICs are simply calling the situation as it is and I don't think they're being unreasonable.

Onto trade. I believe (and I think you agree), that Europe functioned just fine before the EUR came along, and it will function just fine again when the EUR is gone (after a period of readjustment). Those who say it would be a catastrophe are exaggerating the impact and are probably just trying to preserve current profitability. Proposal of an SDR-like euro is a compromise to appease those who balk at the cost of transition as it has to be accepted that refactoring transactional infrastructure takes time and money, and excess currency conversions add significant delays, expense and volatility risk. The euro helped trade, but trade doesn't *need* the euro. The key issue is, as you say, not trade, but the cost of money between nations that share a currency and are managed very differently. The EUR never made sense from this perspective as it created static currency pegs between dynamic nations.

On comparing the IMF and ECB, I'm doing this only as a hypothetical, not as an actual. The hypothetical of the ECB overseeing an SDR-like euro makes it comparable to the IMF overseeing the SDR. Although, I would also argue that the amount of national meddling that the ECB is now participating in (particularly via collateral relaxation under TARGET2) does indeed make it thematically comparable to the IMF at this time.

Meddlers all, for their own benefit. The ECB acts to preserve the euro even if it is a net negative for Europe because the euro is what gives the ECB its power. IMF, ECB, Fed, World Bank, BIS, BoJ, BoE, RBA, etc, all the same in my eyes: parasites sucking on civilization, nothing more than union representatives for banksters the world over serving the addictions of their members.

Again, I appreciate your reasoned reply and will be more correct in the future with language regarding the eurozone and european union.

Urban Redneck's picture

I think the SNB is quantitatively correct is what they are saying, because as overall SNB f/X reserves grow, the primary allocation between USD and EUR holdings must be (constantly) adjusted to so as to minimize taxpayer/bank losses or maximize the gain.  If the SNB actually was absorbing 40% of new issuance, then there would be much greater volatility (in both directions) in the rates of the northern issuers as the allocations in the SNB portfolio are adjusted.

The status of global reserve currency and the usage of the USD for settlement of energy trade has lead to a gross long term and structural overvaluation of the USD, and corresponding undervaluation of EUR.  The northern European states with their relatively strong export sectors have no interest in correcting this imbalance and instead seek a weaker EUR for their own export benefit (just as the SNB seeks a weaker CHF, or at least constant ratio vis-a-vis EUR).

When Germany et al. are willing to accept a EUR denominated energy trade for the European market, and a natural equilibrium for EUR/USD, or they exit the Eurozone, then they might have a valid intellectual or ethical foundation for their arguments.  Right now we have a farce of Do as I say, not as I do vs. Whats good for the goose is good for the gander.

SoundMoney45's picture

Sadly, the SNB is merely dealing with ECB, FED, BOJ, and BOE actions.  

Ar-Pharazôn's picture

lol Bruce..... as a swiss i have a question.


Do we have to do what you want?

Ar-Pharazôn's picture

i mean, are we really the problem?


we have no budget deficit, our economy is still growing and you try to make us pass for the bad guy?





kaiten's picture

You only have no budget deficit and your economy only is growing because you MANIPULATE your currency. You are FAR from being innocent.

Ar-Pharazôn's picture

and btw we're buying bond from Germany, Holland, Finland and Austria.


should we buy them from Greece?


hahahahahaha yes, keep dreaming

Ar-Pharazôn's picture

we manipulate the franc because of his strenght. and that's not something you can discuss.


if not manipulated our EXPORT economy will be chocked.


if you cant understand this simple fact is YOUR problem


we are not in Europe and we do what we want. and this is THE REAL PROBLEM

kaiten's picture

"we manipulate the franc..."


Yeah, thanks for proving my point admitting you manipulate your currency. Now, step down from high horse you riding. You are not better, but worse actually than others, stealing their jobs.

Ghordius's picture

lol - and how do national banks acquire FX reserves without buying foreign currency with their own? funny concept, this "Currency Manipulation"

remind me, when is the US going to accuse China of manipulating their currency? even the discussion on it has been halted

is Switzerland making the CHF cheaper vs the currency of it's main industrial and commercial partners (the eurozone)? Is it flooding the eurozone with cheap products in order to achieve a higher market penetration, and by that destroying local industries? Those are the two classical reasons for declaring "currency manipulation" and, sorry, they don't apply within the EZ/Switzerland context.

welcome to the current currency wars, kaiten, if I remember correctly you are British: what is the BoE doing, lately?

kaiten's picture

Yes, you are wrong of course. Im no british. Also the rest of your post is drivel so no need to comment.

Ar-Pharazôn's picture

british are one of the most arrogant people on earth


they call us robber for the bank privacy, and they have their own fiscal paradise.


when i read things like that i laugh

Tic tock's picture

It's not exactly right/wrong...SNB pegged Franc to Euro mainly to prevent a rout in the Euro's value. To date, any number of 'monetary measures' have been enacted to bolster confidence in the value of a Euro. So, the question here is, while setting a peg to provide a semblance of stability, why use related-income (Franc is cheap) to undermine the value of the Euro....left hand not knowing what the right-hand is doing.

Or, if the SNB is deliberately using a cheap Franc to attract deposits, turning them around to deploy against the Eurozone concept...well, is that a functionally acceptable use of Central-Bank clearance rights?

Augustus's picture

The solution is simple. When the SNB gets another E10Bn from Spain or Italy, they have to put the money back into the bond markets of the countries where the money came from. That would address the EU complaints that will be forthcoming.

The citizens of the countries of Spain and Italy don't trust their governments to repay.  They move the funds to another currency and banking system for safety.  and the solution is for that banking system to buy the ready to default bonds?  The suggestion makes the ECB practice of buying Greek bonds seem sensible.

Urban Redneck's picture

The job of a bank is not to intentionally lose its customers deposits.  If banking customers from Greece, Italy, and Spain move there money from local banks to UBS in a search of safety for their deposits, should UBS redirect those customers to its foreign subsidiaries in Greece, Italy, and Spain, and then direct those local subsidiaries to "invest" the customer's deposits in the sovereign debt of the respective Banana Republics and leave the customers to the mercy of the bankrupt local deposit insurance schemes?  Any bank using customer deposits to buy or "invest" in PIIGS debt, is guilty of gross neglicence and a basic failure of fiduciary obligation, that any bank is statutorily required to do so is testament to the corruption of the system by its regulators.   

GoldBricker's picture


Now that's a word you don't hear much these days. Apparently the concept has gone out of style.

Bear's picture

SNB bond-buying is "exacerbating" the gap between borrowing costs for stable countries like Germany and the rest of the 17-nation euro zone ... they have to get their 'peg' money back some way

GoldBricker's picture


The SNB is applying an unofficial peg. A peg has to be implemented somehow. China holds US treasuries and agencies, the SNB holds short-term club-baltic paper. The Swiss are aggravating the imbalances by lending to Germany in the same way that China and Japan aggravated the US credit bubble by over-lending to America: by buying their paper for political instead of economic reasons.

The real difficulty is that everyone is trying to devalue at the same time, and the Swiss decided to draw a line. All else flows from that.

Ghordius's picture

I disagree with some of the terms. the SNB is applying a very official floor. and by that, they are devaluing at the same pace as the ECB. and by that, they are keeping their industrial and trading integration in the eurozone intact - this is a mainly commercial and industrial policy goal.

Temporalist's picture

Here is some more fuel on the fire:

Exclusive: Vitol trades Iranian fuel oil, skirting sanctions

SINGAPORE/BEIJING (Reuters) - Vitol, the world's largest oil trader, is buying and selling Iranian fuel oil, undermining Western efforts to choke the flow of petrodollars to Tehran and put pressure on Iran's suspected nuclear weapons program.

Vitol last month bought 2 million barrels of fuel oil, used for power generation, from Iran and offered it to Chinese traders, Reuters established in interviews with 10 oil trading, industry and shipping sources in Southeast Asia, China and the Middle East. A spokesman for Vitol declined to comment.

Swiss-based Vitol is not obliged to comply with a ban imposed in July by the European Union on trading oil with Iran because Switzerland decided not to match EU and U.S. sanctions against Tehran.

Ar-Pharazôn's picture

so................ everyone here agree that usa and eu and trying to chocke Iran for economic and resources purpose, right?


so what the fuck do you all want from Switzerland if we're not stupid enought to believe on everything that your MSM says? LOL


we're not a bunch of idiots. and ESPECIALLY we dont like foreigners to tell us what to do

Overflow-admin's picture

Vitol! What you did is bad, and you should feel bad!

Overflow-admin's picture

And here's the fucking sucker cartel!

AvoidingTaxation's picture

And they are rightly doing so.. Why, for god's sake, Switzerland has to comply with EU-USSA sanction against a peaceful nation like Iran. Remember, Persian culture is quite peaceful. In the last 400 years they never aggressed other countries. And Shiites are a minority in the islam teology, we need them in order to contain Salafist and Wahhabites.

DIVIDI et IMPERA, bitchez.

GoldBricker's picture

Search for

"Syria comes to Russia" engdahl

and be enlightened in this topic.

steve from virginia's picture


Can't get no respect: The Swiss should have been recycling euros back to source countries a year ago or earlier. None of this is news.


Capital controls: the Swiss should mandate any funds brought into Switzerland must be invested in stock of Swiss export-dependent companies.


Why not, it works for Bernanke/Geithner!

q99x2's picture

Nothing to make one feel better than to see banksters finally fighting it out. I bet on the Swiss.

barliman's picture



Let me see if I am missing something here:

"The SNB does not break out its bond holdings. The numbers are bunched with central bank deposits. At this point no one knows if S&P is right in its assertions about the SNB bond portfolio. But that doesn’t really matter. If the SNB was loading up on deposits at the Bundesbank, it had the same consequence as direct purchases of government debt; it drove interest rates down. In this case rates went below zero in Germany while they soared in Spain."

So ... the facts don't matter?

Making unsubstantiated accusations is ALL that needs to done?

Has the SNB done anything ILLEGAL even if they have done EXACTLY what they are accused of doing?

Where are you headed with this train of thought, Bruce?  Salem witch trials or Nazi concentration camps?


andrewp111's picture

How are deposits with the Bundesbank (or ECB) equivalent to buying German bonds? I do not see this. Deposits with a central bank can simply sit there. They do not affect interest rates unless the central bank lends them out.

LongSoupLine's picture

That's no pickel, they're fucked.

cbaba's picture


The solution is simple. When the SNB gets another E10Bn from Spain or Italy, they have to put the money back into the bond markets of the countries where the money came from.

Sorry Bruce, I totally disagree with what you said above.

I am on SNB side in this issue. Why would they buy crap Italian or Spanish Bonds ? this would be dumb idea.

They are just protecting their own interest. I would do the same.


IF the ECB or FED don't like this then SNB can do better and buy Gold instead, this will kill the banking cartel Ponzi and remove the lid on Gold price suppression. The ECB and FED must be thankful to SNB for not buying Gold instead.

Overflow-admin's picture

I agree, the SNB is at the knees of UBS and CS, not mentioning cantonal banks and all corporations cartel... plus dumb citizens.

The worst in this is the lack of people understanding the remote consequences of this insane policy. But surprisingly, most of them seem to have a good understanding of the short-term profit (sarc: in fact they are the suckers saying "what? me playing only in my interest? rly?")

Ghordius's picture

agree with cbaba

I particularly like this "they must" from Bruce. does not remind me of free markets at all. And the gold argument is quite powerful, isn't it?

Just as a reminder, Bruce: the SNB is the grandmother of all modern CBs. It is a traded stock company with a special charter granted by an act of parliaments and it is owned in it's majority by the State Banks of the semi-sovereign "Cantons" of the Swiss Confederation. Most of the state banks are fully owned by the Cantons, some are semi-private traded stock companies.

Buy an SNB share and make this proposal at the shareholder's meeting, see what they will tell you about your shareholder's value increasing proposal.

Or do you think the EUropeans should increase their political pressure on the Swiss? What do you propose, an embargo?

lewy14's picture

Agree with cbaba.

A "solution" which requires the SNB to assume exactly those risks the Spanish depositors do not themseleves accept is not a solution.

Any mechanism which would compell the SNB to do so is indistinguishable from global tyranny. 

WestVillageIdiot's picture

If my friend is dumb enough to stick his johnson in a meat grinder, do I have to stick my johnson in a meat grinder? 

Freebird's picture

Yes & no. Helvetia. Almost acting like a rogue state. Ie aud & skr recent purchases - they're skewing the pitch but maybe also at their master's call. Let's see.

Almost Solvent's picture

Take it one step further. 


Why are the Swiss always *NEUTRAL* in global military/financial affairs?



Ar-Pharazôn's picture

because we are in the middle of a continent where everyone was is war for the last 1000 years?

Ghordius's picture

and because of 1515 where you achieved total victory and total defeat of your troops in the same battle

today some would say you were fully hedged

Ar-Pharazôn's picture

the Battle of Marignano sums up pretty much the swiss spirit.


victory or death.


they were outnumbered and they fought anyway. if the French did not arrive in time that day, the swiss people would celebrate one of the greatest military victory in our history

Freebird's picture

Cos they're holding the lolly? Soly.

Colonel Klink's picture

All right, who cut the Swiss cheese?

robnume's picture

SNB - Jump, Fuckers, Jump!!!!!

Big Ben's picture

People are dumping Spanish and Italian bonds because they fear a Spanish/Italian default or euro exit. The move to Swiss Francs is part of a flight to safety. If the Swiss Franc didn't exist they would find some other place to put their money. Perhaps they would buy ST German bonds directly. Or maybe they would buy precious metals or US dollars. The Swiss Franc is just one of many options.

The problem is really due to the former and current policies of the Spanish and Italian governments, not the SNB.

WestVillageIdiot's picture

Who can forget the standup routine performed by Richard Nixon when he blamed those nasty "speculators" for the dollar's problems on the night of August 15, 1971?  Blame the SNB, not the European nations themselves.  Blame the speculators not the out of control government.  Blame them for hating us because of our freedoms, not for hating us because of our foreign policies.

Blame somebody ELSE but whatever you do, make sure you never speak the fucking truth.  The truth is VERBOTEN.  Just ask any government, central bank or lickspittle at a ratings agency.