How Mario Draghi Can Force The Swiss National Bank To Go "Nuclear" On Depositors

Tyler Durden's picture

Earlier this month, Sweden’s Riksbank found itself in a rather awkward position. 

Since doing an embarrassing about face in 2011 by reversing a rate hike cycle on the way to plunging headlong into NIRPdom, the Riksbank has watched Sweden’s housing bubble inflate to what certainly look like epic proportions. Household debt has also become concerning. Unfortunately, inflation expectations have generally been muted and because the Riksbank is in charge of managing inflation and not macroprudential policy, it’s inclined to maintain an easing bias even as it knows that tightening to rein in the housing bubble is probably prudent. Compounding the problem is the ECB, whose €1.1 trillion PSPP isn’t doing the Riksbank any favors when it comes to preventing the krona from strengthening. So you can imagine how vexed Riksbank Governor Stefan Ingves was going into the September 3 meeting knowing that just hours after he made his decision, some expected Mario Draghi to unveil an expansion of PSPP. Needless to say, if the Riksbank remained on hold and the ECB announced more QE, that would be bad news for the krona (i.e. it would strengthen) and thus for Sweden’s hopes of boosting inflation expectations.

Ultimately, the Riksbank gambled and remained on hold, and Mario Draghi only hinted at QE expansion rather than actually confirming it. Here’s what happened to the krona:

You can imagine how bad it would have been if the ECB had explicitly announced a PSPP expansion, committed to extending the program’s duration, or cut rates.

The reason that short story is important is that it highlights the precarious situation created by expectations that the ECB is set to meaningfully expand QE. A PSPP expansion or worse, further rate cuts, would imperil the efforts of regional, non-euro central banks who are struggling to keep a lid on currency appreciation and boost inflation. There is perhaps no better example of this dynamic than the EURCHF cross. 

Indeed, following the fall of the peg in January - which might fairly be viewed as an attempt on the SNB’s part to get out ahead of ECB QE and avoid the massive intervention that would likely have been required to hold the floor in its wake - some now wonder what’s next in the event Eurozone 5yr/5yr inflation doesn’t pick up and the situation continues to deteriorate in China prompting the ECB to expand QE and/or take the depo rate further into negative territory.

For their part, Barclays suggests that in the event of a Mario Draghi rate cut, the SNB might well go to the “nuclear option” which would mean, in the final analysis, that retail deposits would no longer be spared from negative deposit rates.

*  *  *

From Barclays

Our base case is for the ECB, at its October meeting, to extend its timebased commitment for QE for another six to nine months (ie’ through March or June 2017). As a second step, perhaps at the December meeting, the ECB could increase its pace of monthly purchases, or cut the deposit rate on reserves below the current -20bps. The latter option is less likely, but its probability is non-negligible and hence we consider the potential effects of all three courses of action here.

If, as is our base case, the ECB extends the time horizon over which it commits to European government bond purchases, we expect its primary impact to be on 2-3 year EONIA swap rates as the risk of a reversal of ECB balance sheet expansion policies is pushed further into the future. On the margin, the decline in medium-term EONIA rates likely will put further pressure on the EUR to depreciate. However, we do not expect that pressure to be too great on the EURCHF bilateral rate.

As a result, we would expect the SNB to adopt a ‘wait-and-see policy’ rather than respond with immediate action to an extension of the ECB’s time commitment to QE. If EURCHF began to reverse its trend of appreciation, the SNB might cut its deposit rate further into negative territory.

We would expect a similar ‘wait-and-see’ approach from the SNB in the case of an increased pace of purchases from the ECB. Because the policy is reversible if conditions improve – unlike an explicit time commitment – and the effects of QE appear to come mostly through the expectations channel, we would expect an acceleration of purchases to have even less impact on EURCHF than an extension of the ECB’s time commitment.

In contrast, a cut in the ECB’s deposit rate further into negative territory likely would have a significant impact on the EURCHF exchange rate and provoke a more immediate response from the SNB. Indeed, we expect that a cut in the ECB’s deposit rate may have a greater effect on EURCHF than on other EUR crosses. Switzerland applies its negative deposit rate to only a fraction of reserves, currently about 1/3rd of sight deposits by our calculation. In contrast, negative deposit rates apply to all reserves held at the ECB, Riksbank and Denmark’s Nationalbank. Consequently, a cut to the ECB’s deposit rate likely has a larger impact both on the economy and on the exchange rate than a proportionate cut by the SNB. An SNB response to an ECB deposit rate cut could take one of two forms: 1) a further cut in its deposit rate and CHF Libor target range; or 2) the ‘nuclear’ option, removing all exemptions from the negative deposit rate. We think the latter is more likely and would have major implications for EURCHF.

Most retail (private) depositors at domestic Swiss banks still do not face negative interest rates, but we would expect that to change if the SNB removed exemptions of domestic banks on sight deposits at the SNB. Domestic banks receive an exemption of 20x their November 2014 reserve requirement, an amount equal to about 75% of their respective sight deposits at the SNB. Because the non-exempt amount represents only about 5% of their total assets, Swiss banks have been able to swallow the costs and not pass negative rates on to most of their customers. As the non-exempt share has grown, banks gradually have extended negative rates to institutional clients, indirect clients (via external asset managers) and very large holdings of private clients. A removal of domestic banks’ exemption from negative deposit rates likely would force Swiss banks to pass on negative deposit rates as it would increase the proportion of assets charged negative rates to over 20%.

*  *  *

Here's how Barclays sums up the above: "There is a low, but non-negligible risk that the ECB cuts its deposit rate further into negative territory at the December meeting, should the euro appreciate on a trade-weighted basis in the coming months, an action that we believe would initially lead to a significant decline in EURCHF but provoke the SNB to take decisive actions that may lead to rapid and sustained reversal of EURCHF." 

There are a couple of interesting points here. First, we're beginning to see how competitive easing and the global currency wars beget not only an inevitable race to the botom, but in fact a race to the basement as the Riksbank, the ECB, and the SNB are forced to one up (or perhaps "one down" is the more appropriate term) each other or risk further imperiling their inflation targets. Note that this isn't exactly what the Paul Krugmans of the world would have you believe should be the outcome of ultra accommodative monetary policy. 

Additionally, this points to the extent to which turmoil in EM (emanating, of course, from China in one way or another, whether it's the yuan deval or lackluster demand and the attendant global commodities slump) is set to feedback into advanced economies and DM monetary policy. That is, if we get an outright EM meltdown, Mario Draghi is more likely to ease, not only to stabilize markets, but also to ensure that Germany's export machine doesn't get hit even harder from China's hard landing. But as Draghi eases, so too must the Riksbank, and the SNB, lest the franc and krona should strengthen, putting inflation targets at risk. Here's what SNB chief Thomas Jordan had to say on Thursday after standing pat at today's meeting:

"Overall, the Swiss franc is still significantly overvalued, despite a slight depreciation. The negative interest rates in Switzerland and the SNB’s willingness to intervene as required in the foreign exchange market make investments in Swiss francs less attractive; both of these factors serve to ease the pressure on the franc. We must keep negative rates for the foreseeable future."

The SNB also slashed its inflation forecasts for this year and next.

In the end, we suppose the takeaway is this: in today's centrally planned world, the proliferation of NIRP means that nothing is sacred - not even a Swiss bank account.

Incidentally, as today's FOMC decision made clear, the next country to go NIRP might well be the US.

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Whoa Dammit's picture

If the EU does this to bank depositors on top of the forced migrant quotas, that'll be all she wrote for the EU.

knukles's picture

It's all they've ever wanted; inclusive, loving, diverse, socialist redistributionist societies.  Least that's what I was always told "What you bloody fookin' yanks didn't get did you what wif all dem negros of yours rioting in Los Angles, eh?  Bloody racists you are."
I hate to see the European cultures so annihilated into some diverse mishmash of nothingness, but to a very large extent, they're getting what they've always preached. 
You want diversity, have ago at it.  If you don't like it, you can always just undo it.  My ass.

centerline's picture

That genie doesn't go back in the bottle so nicely.  (that saying also triggers memories of watching "I dream of Jeannie"... I would have opened that bottle for sure).

847328_3527's picture

The CBs and Elites want your money and make no bones about it, they want it even if it mean sover your Dead Body.

Shadow1275's picture

Gotta love Socialism. Destroying nations since the birth of Marx. Most people say that if they could go back in time they would kill Hitler. I would kill Karl Marx. The friggin mountain of Trouble he has caused with his "Communist Manifesto" is just staggering. And even after the largest Socialist countries have either fallen, gone into debt, or implemented Capitalist reforms people just never learn. It's maddening. We had a free society that was educated and a booming economy. We have government officials such as Milton Friedman and Ben Bernake admitting that central banks such as the FED caused the Great Depression. We have examples of great societies such as Rome that declined as soon as power is centralized And yet the people vote for these bimbos, socialist programs, multiculturalism, and the expansion of government power. 


I mean if you're mad because the government is corrupt, why the frig would you vote for more government power? 

AGuy's picture

Europe is repeating the same crap the did in the 1920s. Next comes bare supermarkets, and a wave of Fascists promising stocked shelves again.

philipat's picture

Which explains why CB's are trying to ban cash? With negative retail rates, many would withdraw all their cash and either convert it to Gold or store the cash in a safe, under a mattress or in a safety deposit box. Oh, which Banks are also now starting to ban. They have to be able to force people to stay in fiat accounts before they can then move to the next stage, NIRP and the final stage Bail-ins. Brave new world?

And all of this from unelected and unaccountable ivory tower dismal scientiosts.

The only good news here is that the CB's, having worked together against the people for so many years are now turning against each other. No honour amongst thieves?

Urban Redneck's picture

I already walk into a bank once a month and make cash deposit to my landlord's bank account.  It would be even easier to just hand him the cash each month.  Negative rates for retail depositors will backfire on SNB.

logicalman's picture

Just think how many of the world's problems real money would fix.


TheDanimal's picture

I've got it! The SNB should simply leave interest rates alone and engage in helicopter money. That way all the Swiss can live the lifestyle of money printing shysters. 

AGuy's picture

"I've got it! The SNB should simply leave interest rates alone and engage in helicopter money. That way all the Swiss can live the lifestyle of money printing shysters. "

Unfortunately bankers are greedy, They only dump the helicopter money on top of themeselves then bails-in for the J6P's.


Atomizer's picture

Good luck with that Mario. Perhaps you thought we forget about the Cyprus banking bail-in beta test event. 

Atomizer's picture

The illegal alien flooding was never about refugees. If you didn't notice, Google was sponsoring donations today. If you clicked on the link in browser, it was United Nations driven. 


RMolineaux's picture

Yes.  The United Nations High Commission for Refugees (UNHCR) has assisted millions of refugees over the years.

JR's picture

Follow the money on who're the mechanics behind the refugee tsunami that is transforming European culture – “Google to raise $11 million for refugee crisis in Europe in donation-matching campaign”:

Google said on Tuesday it will match the first $5.5 million in donations made at Donations will be distributed to four nonprofit organizations providing aid such as food, water, shelter and medical care to refugees and migrants: Doctors Without Borders, International Rescue Committee, Save the Children and UN High Commissioner for Refugees.

Google is a worldwide communications monopoly with incestuous relations to the US and Israeli governments. It not only interfered in the presidential elections to get Obama elected, it is now engineering multiculturalism throughout the world – save Israel.

For its central position in world communications, it is both a propagandist and a censor, completely in keeping with its service to the NWO tyranny agenda.

The Middle East wars responsible for much of the refugee tsunami in Europe were carried out by the US coalition often in support of Israeli foreign policy. It is ironic, then, that Israel has announced she will not accept any of the refugees – because she is a “small country” -- yet she houses a major portion of Google personnel and management staff.

Israel Building Jordan Border Fence, Won't Accept Refugees

Atomizer's picture

Once Pope arrives, he will use this as a bias statistic to form guilt in not supporting amnesty. 

That's when you tell the Pope to open his church doors first. Watch his reaction. If he rambles on, remind him that the church is tax exempt. Why not run the amnesty experiment on his dime. 

JR's picture

I know a family active in the Catholic church that is not attending Mass because of the political stands of the Pope. The Pope should remember to "Render  therefore unto Caesar the things which are Caesar's; and unto God the things that are God's."

ANDREW NAPOLITANO: “I am sighing because the Holy Father is a challenge for traditionalist Roman Catholics, of which I am one. Particularly, traditionalists who came of age under John Paul II and then under Benedict XVI. Who, though they had impulses that were not exactly Ayn Rand on capitalism, were far more into philosophy and theology, and far less into the economy ... This particular Pope, who has proclaimed himself a Peronist, is somewhere between a communist with a lowercase ‘c’ and a Marxist with an uppercase ‘M.’ At the same time he is trying to be a Roman Catholic -- uppercase ‘R,’ uppercase ‘C.’


“The Pope is infallible on faith in morals. Thank God it is just limited to faith and morals because he is, he is -- he sounds like a left-wing professor at the London School of Economics when he blames the mass migration on economic inequality.”

philipat's picture

Napolitano for AG......

RMolineaux's picture

The way things are shaping up, it appears that we should re-convene Bretton Woods.

Sages wife's picture

Just have a hot blond scare the shit out of him.

jcdenton's picture

Let's talk about the Swiss shall we? Good ol' Swiss ..

Go straight to the book available for download. Do a Ctrl-F and type in "swiss." See how many places it takes you in 16 chapters. Gee, they appear to show up almost in every chapter (with the exception of Swiss Francs.)

Good ol' Swiss. Our chums, the Swiss ..

Look up Operation Chaselet ..

As far as I'm concerned, as of the summer of 1993, the USG had every prerogative to declare war on Switzerland. But we had a POTUS with no stones. More than that, we had a Swiss govt. simply doing the bidding of Washington D.C.

FYI , that was the summer Vince Foster was murdered. On 7/7/93, Foster was to meet Wanta in Geneva. They never met. Wanta was arrested on that day, and Foster is dead 13 days later ..

RMolineaux's picture

Remember the old Swiss proverb:  you guys fight, we'll hold the money. 

tarabel's picture



Whenever I hear that a currency is "overvalued" or "undervalued", I find myself wondering why a certain elect group of people (and no, this isn't about jews) get to make that determination.

If a lot of people want Swiss francs rather than their own shithole currencies, that represents a tidy profit to everyone who already holds them-- plus a reward for farsighted investment decisions.

Then along comes some globalist nazi organization that decides such a move is not in its own personal interest and proceeds to grotesquely distort the simple verdict of the market. Regular players get shafted while the high and the mighty get to pin their currency to any number that makes their own plans work out best. 

But Der Tag is fast approaching. The laws of economics can be bent for a very long time but they cannot be permanently broken.


Fuck Barclays thoughts Bubble  --  what would they know?  Anyway if you've got a Swiss A/C its main function would be to use to stash physical Gold -NOT fiat !

RMolineaux's picture

The Swiss tried to peg their franc to the euro because they could not sell their exports to anyone, and tourists would not go near the place.