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SNB in a Pickle
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:
*SNB SAYS S&P REPORT CONTAINS `FUNDAMENTAL ERROR’
*SNB SAYS FIGURE OF EU80B BOND PURCHASES IS `UNFOUNDED’
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.
Note:
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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Gold was stopped in its tracks shortly after the Frankish Euro peg.
Typo alert: I think Bruce meant "By its actions, the SNB exasperated the Germans"
...or was that, exasperated the ECB....or...
Well, anyway, this is a serious charge indeed, as exasperation is the LAST thing we need (just ask the Chinese. Or the Japanese...or the Iranians...or the Turks....)
That was from S&P?
BK, your link above is not working in your original version above, directly after you write:
« Unnoticed you say? I said exactly what S&P said today way back on August 7 »
Very funny their comment, as Bruce Krasting was indeed quite early on this topic ...
But MSM boobs claim it was 'un-noticed' because they did not see it on the narrow MSM cabal ... wasn't on Bloomberg, Reuters or the FT so 'nobody was talking about it', ha!
I think he meant "exacerbated" and not "exasperated"
Don't the Swiss people care?
Like all other respectable discussion of the crisis, the fixation is on the short term.
It's probably pitched as an export-competitiveness issue, something like "if our currency appreciates too much then everyone who works in export businesses will be out of a job". Make them afraid. Frighten and conquer.
I have read that many Swiss consider the Swiss multinationals to have disproportionate influence on government policy, and the multinationals would be the immediate losers from a SFr appreciation.
There are other, murkier, factors at work. The SNB needs to hold its excess reserves in something, so why not gold? Oh right, that would make the SFr increase even more. Nope, it has to be euro paper. That or capital controls, which are coming soon to Europe.
"t's probably pitched as an export-competitiveness issue, something like "if our currency appreciates too much then everyone who works in export businesses will be out of a job". Make them afraid. Frighten and conquer."
exactly sir
They don't understand.
The politicians argue for months if they should increase the capacity of the main north-south tunnel called Gotthard for a pesky amount of 5 billion while the SNB buys German and Austrian bonds for 10 times this amount on a monthly basis.
this is really pointless.
and if you dont know about Gotthard problem better if you dont speak
i'll give you another analogy.
50 billion chifs (in one month!) could have bought a photovoltaic roof for every single building in Switzerland including a small battery bank, in order to make the Swiss more energy independent.
Do you now get the point?
never mind, they will print more and more and more and more .......
currency war is a bitch
atm energy in switzerland is 60% produced by nuclear and 40% by dams, and our balance is positve. fact.
why should we waste 50 bilions on solar panels? we're already one of the most green countries in the world (if not the greenest). The federal governement already give subsidies to family that buy solar panels.
the problem here is that we are an economy based on export, and the "strong" franc is not really good for that. 1.20 it's quite balanced but in order to maintain this peg we have to buy..........
hard assets, then again this would back fire on the currency "peg".
As i said currency wars are a bitch, followed by real wars, even bitchier.
Its hard to look at the global downturn for months, if not years in a calm mood.
It,s like watching a marathon on tv that airs in slow motion.
So boring, but rewarding for physical pm holders.
" 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."
At least they are not printing funny money out of thin air. They are just moving deposits from one place to another. I think the SNB takes a big ass backseat to the fed.
What is the largest single economic threat the globe faces today?
It ain't the SNB, It is the fed. Just wait till we blow the roof off the debt ceiling in December. Automatic spending cuts? My ass, eliminated. 16 trillion. 18 trillion 20 trillion....kaboom. Game over,
"kaboom. Game over"
Insert gold coin to continue...
BK, a propos SNB, I believe the old saying was 'all's fair in love & currency wars, bitchez!'
Vlasic Bitchez
This all brings to mind how well a Kosher Dill goes with a good Emmentaler..
Paul Krugman and his little lackey, Joey Weisenthal, have stated that as long as the ECB keeps printing fiatski and the ESM/ECB buy PIIGS+France debt, all will be fine.
So....there's that.
/SARC