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"The Consequences Of The SNB Decision Will Not Be Limited To Switzerland"

Tyler Durden's picture




 

Authored by Markus Brunnermeier and Harold James, originally posted at Project Syndicate,

Since the European sovereign-debt crisis erupted in 2009, everyone has wondered what would happen if a country left the eurozone. At first, the debate focused on crisis countries – Greece, or maybe Portugal, Spain, or Italy. Then there was a rather hypothetical discussion of what would happen if strong surplus countries – say, Finland or Germany – left.

Through it all, a consensus emerged that an exit by one country could – like the collapse of Lehman Brothers in 2008 – trigger a wider meltdown. Now, in Switzerland, we have a demonstration of just some of the risks that might emerge were a surplus country to leave the eurozone.

In September 2011, Switzerland pegged its currency to the euro to set a ceiling to the Swiss franc’s rapid appreciation in the wake of the global financial crisis that erupted in 2008. The country thus became a temporary adjunct member of the European monetary union. But, on January 15, the Swiss National Bank (SNB) suddenly and surprisingly abandoned the peg.

Obviously, exiting a real currency union is far more complex and legally fraught than ending a temporary exchange-rate arrangement; the effects of such a move would be greatly magnified. Nonetheless, the Swiss move reveals at least some of the uncertainties that a full-fledged exit could create.

The SNB was not forced to act by a speculative run. No financial crisis forced its hand, and, in theory, the SNB’s directorate could have held the exchange rate and bought foreign assets indefinitely. But domestic criticism of the SNB’s large buildup of exchange-rate reserves (euro assets) was mounting.

In particular, Swiss conservatives disliked the risk to which the SNB was exposed. Fearing that eurozone government bonds were unsafe, they agitated to require the SNB to acquire gold reserves instead, even forcing a referendum on the matter. Though the initiative to require a fixed share of gold reserves failed, the prospect of large-scale quantitative easing by the European Central Bank, together with the euro’s recent slide against the dollar, intensified the political pressure to abandon the peg.

Whereas economists have modeled financial attacks well, there has been little study of just when political pressure becomes unbearable and a central bank gives in. The SNB, for example, had proclaimed loyalty to the peg just days before ending it. As a result, markets will now hesitate to believe central banks’ statements about future policy, and forward guidance (a major post-crisis instrument) will be much more difficult.

There is historical precedent for the victory of political pressure, and for the recent Swiss action. In the late 1960s, the Bundesbank had to buy dollar assets in order to stop the Deutsche mark from rising, and to preserve the integrity of its fixed exchange rate. The discussion in Germany focused on the risks to the Bundesbank’s balance sheet, as well as on the inflationary pressures that came from the currency peg. Some German conservatives at the time would have liked to buy gold, but the Bundesbank had promised the Fed that it would not put the dollar under downward pressure by selling its reserves for gold.

In 1969, Germany unilaterally revalued the Deutsche mark. But that was not enough to stop inflows of foreign currency, and the Bundesbank was obliged to continue to intervene. It continued to reduce its interest rate, but the inflows persisted. In May 1971, the German government – against the wishes of the Bundesbank – abandoned the dollar peg altogether and floated the currency.

Politics had prevailed over central-bank commitments. Within three months, the fallout destroyed the entire international monetary system, and US President Richard Nixon took the dollar off the gold standard. The credibility of the entire system of central bank commitments had collapsed, and international monetary policy became extremely unstable. The Deutsche mark appreciated, and life became very hard for German exporters.

Today, the global ramifications of a major central bank’s actions are much more pronounced than in 1971. When the Bundesbank acted unilaterally, German banks were not very international. But now finance is global, implying large balance-sheet exposures to currency swings.

Big Swiss banks fund themselves in Swiss francs, because so many people everywhere want the security of franc assets. They then acquire assets worldwide, in other currencies. When the exchange rate changes abruptly, the banks face large losses – a large-scale version of naive Hungarian homeowners’ strategy of borrowing in Swiss francs to finance their mortgages.

Though the SNB had given many warnings that the euro peg was not permanent, and though it had imposed a higher capital ratio on banks, the uncoupling from the euro came as a huge shock. Swiss bank shares fell faster than the general Swiss index.

The risks created by the SNB’s decision – as transmitted through the financial system – have a fat tail. The negative effects for the Swiss economy – through the decreased competiveness of its export industries (including tourism and medicine) – may already be showing that abandoning the euro peg was not a good idea.

But the consequences will not be limited to Switzerland. After years of wondering whether the exit of a small, fiscally weak country like Greece could undermine the euro, policymakers will have to deal with an even bigger shock stemming from the exit of a small, fiscally strong country that is not even a member of the European Union.

 

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Sat, 01/17/2015 - 16:09 | 5674397 Panic Mode
Panic Mode's picture

Hong Kong should end the peg to USD

Sat, 01/17/2015 - 16:20 | 5674422 MrButtoMcFarty
MrButtoMcFarty's picture

That's just a matter of time I'm thinking.....I would guess they will wait until the US econonomy is on it's knees....when it will inflict the most damage.

 

Sat, 01/17/2015 - 16:38 | 5674465 Publicus
Publicus's picture

Once Chinese peg to the USD ends, it's all over for the Fed.

Sat, 01/17/2015 - 16:41 | 5674478 MrButtoMcFarty
MrButtoMcFarty's picture

Yep....apparently we have a Bankster in our midst....

LOL

Sat, 01/17/2015 - 17:25 | 5674586 kchrisc
kchrisc's picture

'Once Chinese peg to the USD ends, it's all over for the Fed."

It will be almost over, as the guillotines will still need to do their work.

The banksters need to repay us.

 

In the end, the banksters will have three choices: Wall, tree or guillotine.

Sat, 01/17/2015 - 18:56 | 5674809 zeropain
zeropain's picture

yah there is a reason why there was so many suicides and strange deaths of bankers last year.  

funny how bankers take the "game" so seriously and will end up misserable.  If you consider having money, sex with who ever you want and doing what ever you want then the winners to me are guys like Russle Brand and David Choe.  And they got the money sex and freedom cus they did not take the game seriously and see the whole thing as a joke.  I love the insane drama of David.  Artist turned millionaire, Sex addict with harems at the Casinos, hitch hike through china, what character.  

https://www.youtube.com/watch?v=saINV8usboQ

Sat, 01/17/2015 - 20:41 | 5675062 MalteseFalcon
MalteseFalcon's picture

Who wants a cold chop when they can have a hot stake?

Ynuck, ynuck!!

Sat, 01/17/2015 - 16:20 | 5674428 Captain Willard
Captain Willard's picture

There is plenty of open speculation in the financial community that this will happen.

But are you sure the HK$ would go down?

Sat, 01/17/2015 - 16:40 | 5674471 Panic Mode
Panic Mode's picture

No, I expect the HKD will perform in similar direction as Singapore dollar but of course different magnitude.

Sat, 01/17/2015 - 16:16 | 5674414 BeanusCountus
BeanusCountus's picture

Media not making big deal about it. Why do I have this queasy feeling about Monday/Tuesday?

Sat, 01/17/2015 - 16:22 | 5674425 29.5 hours
29.5 hours's picture

 

 

Maybe not Monday or Tuesday, but we have not seen the fallout end. A 'world order' pillar is knocked loose and it is not reasonable to expect the consequences to end at a few currency exchange houses.

It is reasonable to expect that this event will deepen the current tendency for the dollar to strengthen. This has important consequence in the price of things...like oil.

 

 

 

Sat, 01/17/2015 - 16:28 | 5674443 El Vaquero
El Vaquero's picture

It feels like we have a whole flock of black swans circling overhead right now, and getting tired enough that they will all be landing at once.  SNB's actions may have been the first.

Sat, 01/17/2015 - 16:32 | 5674455 The Big Ching-aso
The Big Ching-aso's picture

I'm waiting for Samuel L. Jackson in Pulp Fiction II to address some preppy white kid about to get shot.......

"Hey you flock of black swans...."

Then ya know The End is close baby, real close.

Sat, 01/17/2015 - 16:47 | 5674488 El Vaquero
El Vaquero's picture

I wish they had called it a white crow instead of a black swan though.  Not only are they kind of creepy looking:

 

http://kitcampbell.com/wp-content/uploads/2013/01/White-Crow-image.jpg

 

Because then I could have said "It feels like we have a murder of white crows circling overhead..."

Sat, 01/17/2015 - 17:01 | 5674517 UselessEater
UselessEater's picture

Perhaps a 'world order' pillar was set loose in exactly the way it was supposed to fall. I figured a year or so ago the AUD would sink towards 75 (yeah got slapped for that comment)... looks like 70 is possible, but in a few months, I'm wondering if it may end up possibly appearing to be a cleaner shirt in the hamper for a moment?

Any thoughts?

Sat, 01/17/2015 - 17:15 | 5674563 29.5 hours
29.5 hours's picture

 

 

I'm not a betting man but the people who are, are betting against commodity-based economies and currencies. In our world, the people who make things continue to take a beating. In Switzerland, it will be the exporting manufacturers who will take a hit for months.

 

 

Sat, 01/17/2015 - 17:18 | 5674570 Fun Facts
Fun Facts's picture

In the broken casino pinball markets today, the AUD widget is seen as a commodity currency. Ie, it is extremely correlated to commodity prices regardless of other actual issues.

It is possible to exploit this behavior.

Sun, 01/18/2015 - 04:27 | 5675918 Element
Element's picture

Indeed.

A few months back the visionary geniuses in here, and elsewhere, were claiming Australia's "mining boom is over", not understanding even the basics, that the investment in mining CONSTRUCTION was slowing down in a planned and fully expected way (i.e. we knew this was going to occur, 4 years out), and that the MINING boom, i.e. the new long-term production ramp was just getting started. Long-term supply contracts into huge markets with almost all the new production projects.

So revenue stream moves into mild-flood, from here, and will keep growing. Asia now has its dream of open access to excess and cheap high-grade resources, while the AUD has plummeted and Tapis is down ~60%. So Australian energy and minerals are becoming an irresistible bargain once again in Asia. Get ready for the buying frenzy to follow, and the new massive wave of investment to come.

And just as all those major free-trade tariff reduction deals with Asia are kicking-in.

 

 

Sun, 01/18/2015 - 04:28 | 5675922 The_Prisoner
The_Prisoner's picture

Hunter valley coal miners don't quite agree.

As far as Iron Ore, just wait until FMG goes care and maintenance.

Unless your argument is based in the assumption that a duopoly (BHP, RIO) is a healthy industry.

Sun, 01/18/2015 - 05:44 | 5675960 Element
Element's picture

WTF? Just what argument do you 'think' I'm making? Do you even understand what I wrote?

A statement of the prevailing situation is not an 'argument'.

What the hell has Hunter Valley coal got to do with it? They can close the pit down and stop feeding the power generators any time they like. they will go broke and someone will buy them out and reopen it.

And Hunter valley miners are not forced to work in a coal mine, they can go work mowing lawns or delivering milk if it makes them happy, who cares what they decide to do? Just what the hell are you on about?

RE FMG, an individual player's survival or failure in business is up to them to make the smart competitive choices and operate their company accordingly, or fail and go away. If Andrew Forrest ends up out on the bones of his arse out the door I'll actually laugh, he's had it coming for a long time now.

And there are far more than two iron ore miners in Australia, as you again inaccurately implied. If they work hard and have a smarter boss than Forrest, they may get bigger one day as well.

 

 

You have a serious chip on your shoulder Prisoner, your comments are uninformed, inaccurate, inapplicable, often warped and generally a bit retarded. How you got that way and what you plan to do about it is all your problem though.

 
EDIT: I think I just got it, you were one of the "visionary geniuses", mentioned above, going around zh and saying the "mining-boom is over", right? ROFLMAO! You moron! You don't have a damned clue  ... and you even live here!

Sat, 01/17/2015 - 16:23 | 5674430 aleph0
aleph0's picture

 

"The Deutsche mark appreciated, and life became very hard for German exporters."

.. but the rest of Germany continued to do very well ... until the Globalists dragged the once conservative German Banks into Fiat Oblivion.

I was there when we had 12 DM / 1 GBP ... i.e. the German Exporters were literally giving the stuff away ... much like China does today.

Sat, 01/17/2015 - 16:25 | 5674438 disabledvet
disabledvet's picture

Not Hungarian homeowners??!!!

 

I mean seriously...the Swiss Franc is worthless.  We dont have negative rates in the USA...people are just acting weird when they hold Swiss francs let alone denominate anything in that money.

 

The money is backed by nothing.

Maybe a cow.

Some "cow bell" maybe.

 

 

A "German Euro".... Bwhahahahahaha.  That's a good.

 

Run to the Yen!  Even more hilarious.

None of this paper provides anything to the holder of it.

 

IT IS WORTHLESS.

Sat, 01/17/2015 - 16:29 | 5674447 Winston Churchill
Winston Churchill's picture

They are all derivatives of USD's which are worth nothing.

What difference,at this point, does it make ?

Sat, 01/17/2015 - 16:57 | 5674507 disabledvet
disabledvet's picture

WE DO NOT CHARGE FOR

DEPOSITS IN THE USA.

The Bank....cough,cough, "earns" interest simply by putting the money there. The Banks then turn around and "lend" at 18% interest.

That is called MINTING monies. USURY!

Using DOLLARS?

CRIMINAL in my view.

And what does the Government do? SPEND DOLLARS LIKE THEY OWN THE PLACE AS PRICES GO THROUGH THE ROOF!

Bwhahaha. Now you're lending to a municipal authority at 18...well, okay ...12 percent.

WITH THE TAXPAYER AS YOUR BACKSTOP.

CRAZY!

In the meantime you have the Marcellus and Utica shale....INFINITY DOLLARS.

Why own ANY DEBT PERIOD?

Darn right those treasuries are soaring in value. "Last Asset Standing." Its the only hedge against the annihilation of all fiat monies AND THE DEBT TOO.

Sat, 01/17/2015 - 17:55 | 5674661 GMadScientist
GMadScientist's picture

No, we pay banks for their reserve deposits here (how you say that isn't negative rates is beyond me).

And though the balance reserve reqs are 60-80B, they all seem to have $2.5T stashed there.

Wake up and smell the real criminals and not just their patsies.

Sat, 01/17/2015 - 16:43 | 5674479 Beowulf55
Beowulf55's picture

"We dont have negative rates in the USA."

Damn close.........   1/10th of 1.0% on local savings accounts......whohoo, I'm beating inflation now! (that's /sarc for those not sure if I am kidding or not).

Sat, 01/17/2015 - 16:47 | 5674493 Bangalore Torpedo
Bangalore Torpedo's picture

We have voluntary negative rates.  Example: Suntrust got the urge to start dinging my business checking account for $10 a month as some kind of BS "fraud protection" service. 

Sun, 01/18/2015 - 02:26 | 5675827 zeropain
zeropain's picture

Adjusted for inflation. You are losing money sitting at the bank. Wealth destruction.

Sat, 01/17/2015 - 16:45 | 5674489 Bangalore Torpedo
Bangalore Torpedo's picture

The only swiss francs that I hold happen to be 20 franc coins with a picture of Heidi on one side and a cross on the other.  If it's paper then the only people who want it are the Venezuelans as the banana peel wipes are starting to get old.

Sat, 01/17/2015 - 16:45 | 5674490 palmereldritch
Sat, 01/17/2015 - 16:54 | 5674502 Piranhanoia
Piranhanoia's picture

"I'd like to be a cow in Switzerland"

https://www.youtube.com/watch?v=gBLRLWzRdgQ

Sat, 01/17/2015 - 17:09 | 5674547 trader1
trader1's picture

your opinion is worthless too. :-P

Sat, 01/17/2015 - 19:43 | 5674919 bitusa
bitusa's picture

You are right, all fiat money is really nothing but paper.  Well...maybe having a dozen aircraft carrier groups helps ;-)) some paper.  I have always thought we should replace George's image on the dollar bill with that of a Nimitz-class super-carrier. 

<img src="http://en.wikipedia.org/wiki/File:USS_Nimitz_in_Victoria_Canada_036.jpg" border="0" style="border:none;max-width:100%;" alt=Nimitz -class"" /></a>

Sun, 01/18/2015 - 00:40 | 5675671 orez65
orez65's picture

"... we should replace George's image on the dollar bill with that of a  Nimitz-classsuper-carrier"

Since the US made the deal with the Saudis: protecion if you only sell oil in US Dollars. Thereby the "petro dollar" nickname. It may be more appropriate to decorate the US Dollar with Saudi oil rigs.

Sun, 01/18/2015 - 10:40 | 5676256 Rollo57
Rollo57's picture

As will the 'dollar' be, very soon?

US are pushing Putin towards a war, because he along with China, want out of the 'Petrodollar', as this will hurt US they now need a war to hide the 'collapse' behind!

http://beforeitsnews.com/economics-and-politics/2014/12/paul-craig-rober...   < reason China weren't sanctioned! 

Sat, 01/17/2015 - 16:28 | 5674445 ebworthen
ebworthen's picture

It has been rather humorous to hear commentators and traders in the U.S. and Europe get angry at the SNB for getting rid of the peg and not "telegraphing" their move.

Imagine that!  Someone in government coming to their senses and protecting the taxpayer instead of the FX trader and the equities casino gamblers!

Sat, 01/17/2015 - 18:27 | 5674743 Stroke
Stroke's picture

+ 1 for sure

 

The SNB "knows" which way the Euro is going, and already polluted thier currancy with more than enough Euros

The Swiss took a beating with FATCA, & with too many Euros...

Time to wave "by- by" & try to save it's self.

The dominos are starting to fall, and it looks like the Swiss made it out alive. They'll sell a few less watches & chocolate...Good for them

 

Sun, 01/18/2015 - 13:44 | 5676742 Dollarmedes
Dollarmedes's picture

With all the people who shorted the Swiss and lost big, it appears the banksters thought the Swiss Euro-peg was bad for them too. The only surprise was that the Swiss decided not to play their part as victims. I love it when banksters lose money!

Sat, 01/17/2015 - 18:54 | 5674806 Anusocracy
Anusocracy's picture

"Someone in government coming to their senses and protecting the taxpayer"

Spoken like a true dupe.

Sun, 01/18/2015 - 03:20 | 5675879 ebworthen
ebworthen's picture

Perhaps, but at least they stopped the peg and didn't telegraph it to the casino.

If they really come to their senses they will shut down the National Bank.

Sat, 01/17/2015 - 16:40 | 5674466 Joebloinvestor
Joebloinvestor's picture

When it is a fiat, it is just politics and smoke and mirrors.

I LOL at seeing FX traders getting fucked.

Wait till the Greek election and the CDS blow up. 

 

The real hilarious part is the doom and gloom (from a pulpit yet!) that was preached should the Swiss pass the gold referendum.

Sun, 01/18/2015 - 02:49 | 5675844 Lore
Lore's picture

Greek election next week.  Will they do the right thing?  Are Greek people asleep or awake? 

One thing from the article above stands out as laughable: "...markets will now hesitate to believe central banks’ statements about future policy."  < How should one respond to a statement like that?  Facepalm.

Sat, 01/17/2015 - 16:38 | 5674468 Rusputin
Rusputin's picture

When I was a kid, I always wanted a Swiss Army knife, but could never afford one. I guess they are now well and truly out of reach for me, damn it!

Sat, 01/17/2015 - 16:52 | 5674499 Karaio
Karaio's picture

You do not return our gold, fine.

We took the ball and headed out of the field, we go home ...

The "ball" is ours!

Niinguêm see, no one speaks.

They are sucking fiat ATMs and returning Euros.

There is another logical consequence in the whole thing, is much more expensive for those who do not reside in Switzerland go there, involves all kinds of immigrants dropped only and only with this play.

Swiss with hard currency can buy anything they need, its export industry involves a lot of precision technology that, who needs pay for it, do not adhere only to cheeses and chocolates.

Switzerland did not like that leveraged its currency, who did get fucked.

Wait for more accidents with nail gun in the West ...

hehe.

Sat, 01/17/2015 - 17:03 | 5674521 disabledvet
disabledvet's picture

Send the boys from Vicenza north and get the gold back.

 

Park it all in Italy (provided Switzerland even has any) and THEN see how much its worth.

Sat, 01/17/2015 - 17:12 | 5674558 negative rates
negative rates's picture

That just gets you back to green shoots bitches, and we all how well that ended last time.

Sat, 01/17/2015 - 17:26 | 5674584 Karaio
Karaio's picture

Any illiterate in Switzerland speaks three languages e atira muito bem.

hehe.

Sat, 01/17/2015 - 19:04 | 5674825 Monty Burns
Monty Burns's picture

I don'tunderstand your reference to immigrants. The SNB move makes Switzerland much more attractive for immigrants, both those in situ and those planning to roost there.

Sat, 01/17/2015 - 17:23 | 5674580 kchrisc
kchrisc's picture

My first thought on the SNB move is, "Who will be next?"

The banksters need to repay us.

 

One day I will emulate the Hunger Games with banksters.

Sat, 01/17/2015 - 17:29 | 5674591 Heavy
Heavy's picture

What's the hand say to the face? *SLAP" bitchez!

Sat, 01/17/2015 - 17:37 | 5674611 Kokulakai
Kokulakai's picture

We're gonna' need plenty of rope.

Sat, 01/17/2015 - 18:38 | 5674765 will ling
will ling's picture

 uh, maybe baskets?

Sat, 01/17/2015 - 17:53 | 5674658 NoTTD
NoTTD's picture

The negative effects for the Swiss economy – through the decreased competiveness of its export industries (including tourism and medicine) – may already be showing that abandoning the euro peg was not a good idea.

Swiss Tourism and medicine dropped in the last 48 hours?  These guys havebeen listening to the bankers and exporters only.  The average Swiss just had their household wealth increase by 30%, in relative terms.  Of course, we're not to concern ourselves with the state of the actual residents of any given country.  You know, the "country" is made up of bankers.

Sat, 01/17/2015 - 20:06 | 5674968 DOGGONE
DOGGONE's picture

HUGE has happened before!
Fixed rate, for about 25 years, ending 1971 -- was 4.3 Swiss francs to buy 1.00 U.S. Dollar.
The subsequent floating rate has been as little as about 0.75 Swiss francs per one U.S. dollar.
HUGE has happened before!

Sun, 01/18/2015 - 02:52 | 5675848 sun tzu
sun tzu's picture

Not overnight

Sat, 01/17/2015 - 20:43 | 5675065 risk.averse
risk.averse's picture

The average Swiss just had their household wealth increase by 30%, in relative terms. 

point taken, NoTTD, but if you're a Swiss who works for Roche ...or Swatch,say, and your job is about to be exported to China where they're been making perfect copies of Swiss prestige watches for years [effectively the Chinese product counterfeiters have passed their audition and are about to be rewarded with juicey contracts from Switzerland] then you'll need the increase in savings you mention to pay the bills.

 

There will be winners and losers in such a tumultous change. If Swiss exporters start to wind back then the demand for foreign guestworkers (from nearby Eurozone countries such as Italy) will plummet and the knock-on effects in those countries will be dire -- exacerbating the effects of their terrible homegrown unemployment. Many families in Italy, Slovenia, etc rely on the money sent back from family-members working in Switzerland.

 

Sun, 01/18/2015 - 02:59 | 5675850 Lore
Lore's picture

Re: "perfect copies of Swiss prestige watches for years..."  < I beg to differ, and I have the souvenirs to prove it. They may look the same, but they are not the same. hahaha

Sat, 01/17/2015 - 21:57 | 5675303 noben
noben's picture

Lateral Thinking exercise: The 30% instant Wealth Effect is mathematically equivalent to Gold prices dropping accordingly -- but only for the Swiss.

Sounds of trucks heard in CH: beep, beep, beep...

Sun, 01/18/2015 - 07:43 | 5676046 SmittyinLA
SmittyinLA's picture

SNB decision was a direct  consequence of reality, the Russian reality.

SNB was an effect not a cause.

The Swiss reflect reality.

 

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