Guest Post: The Big Swiss Faustian Bargain

Tyler Durden's picture

Submitted by George Dorgan of SNBCHF blog,

Differences between SNB, ECB and Fed Money Printing Explained

Most recently Guggenheim Partners showed in their “Faustian Bargain of Central Banks”, also appeared in the FT, that the Fed could lose 200 billion US$, when inflation comes back again. Interest rates would increase by 100 basis points and the US central bank would be bankrupt according to US-GAAP.

We explain in this post the differences between money printing as for the Swiss National Bank (SNB), the ECB and  the Fed. We show the risks the central banks run when they increase money supply, when they “print”.

This link to the SNB website gives insights how many francs the Swiss National Bank requested commercial banks to deposit during the last week. It is just a technical accounting process: Minus (or liability) for the SNB, Plus (or assets) for the banks. Therefore it is often called “printing” like adding a zero to a currency exchange rate. The SNB uses this “printed” money to buy more and more currency reserves and to enforce the peg. At the same time printing increases the banks’  reserves at the central bank. It allows banks to give more loans to consumers and home builders via the money multiplier.

During the times when the SNB buys FX reserves, the increase of bank deposits, i.e.SNB debt at banks, moves nearly in-line with the increase of FX reserves.

SNB Graph FX reserves Money July27


The Limits of Money Printing


The following graph from the SNB former president Hildebrand (2004) shows that a period of inflation had regularly followed the SNB monetary expansion with a delay of about 2-3 years.

Price Inflation follows Monetary Expansion

Price Inflation follows Monetary Expansion (Source Hildebrand SNB)


Theoretically banks could tell the SNB not to credit their accounts any more, this would prevent the SNB from further printing. Still banks are sure to get the money back one day and they want to be more profitable issuing more loans. Therefore the SNB had ideas for an anti-cyclical capital buffer in order to stop excessive mortgage loans practices and preserve banks’ capital for a possible downturn. Many people fear the a similar bust of the Swiss real estate bubble like in the 1990s.

The SNB thinks to be able to get rid of their excessive currency reserves one day and/or to sterilize deposits (i.e. remove sight deposits from the banks and to convert them into SNB bills). The deputy member of the SNB board Dewet Moser proudly presented in this SNB paper how easy it was to sterilize between May 2010 and July 2011 (see also in the reserves overview above). However he does not speak about the fact that the Swissie strongly appreciated (from EUR/CHF 1.40 to 1.10) during that period and the SNB had to accept huge losses.


Money Printing in the euro system and the potential tax-payer bailout of the Bundesbank


Inside the euro system, the most important way of money printing is debiting the account of the ECB and crediting the accounts of the National Central Banks (NCBs)  according to their participation in the Euro system.  This is along the following schema:

Money Printing and Eurosystem Participations

Eurosystem Participations

30% of the ECB capital belongs to non-euro states like the UK, Sweden, Denmark, Poland or other non-euro EU member states. These 30% are removed in order to obtain the participations in the euro system.

Printing money means that the ECB increases its debt towards the NCBs in the ratio of the euro system participations, namely Bundesbank 27%, Banque de France 20%, Banca d’Italia 20% and Banco de Espana 12%.

If the ECB buys peripheral bonds with this “printed” money, it implies an implicit transfer from the Bundesbank and the Banque de France and other Northern states towards the periphery, i.e. state financing via the printing press.  By nature of the bad ECB assets this is also called “qualitative easing”. 

The Bundesbank losses could be partially realized, when one day a country leaves the eurozone (either Germany or some peripheral countries). What does “partially” mean:
We saw already similar discussions in March, when it had to be decided, if private or public entities take the losses in Greek government bonds. One day, maybe in a couple of years, the ECB or the Bundesbank, the public entities, will also need to take losses, a haircut.

The Bundesbank refinances the credit to the ECB, via an increase of its debt at German commercial banks. These again will possess more reserves. Based on those they may give more loans to German firms and housing. This operation will increase inflation over the medium and long-term.

The following graphs gives an overview of the of German banks’ deposits at the Bundesbank, i.e. the Bundesbank debt with German commercial banks.

Net Bundesbank Assets vs. German Banks

Net Bundesbank Assets vs. German banks dive deeply into negative territory (source

Bundesbank Liabilities vs. German Banks

Total Bundesbank Liabilities against German banks    (source


On one side the Bundesbank has more and more liabilities with German banks. On the other side this graph shows how much foreign Bundesbank foreign assets have risen over the years:

Bundesbank Foreign Assets

Bundesbank Foreign Assets (source


A future haircut of 30% on peripheral positions (of currently about 700 billion €), would cost German taxpayers, 210 billion €, 5% of German GDP, more than the Bundesbank equity. This haircut would require German tax-payers to bailout the German Bundesbank. See more why Weidmann has finally realized this problem together with inflationary risks and his critics with the ECB.

The Swiss Faustian Bargain: Swiss Money Printing a lot more risky than the Fed’s QE3


Most recently Guggenheim Partners showed in their “Faustian Bargain”, also appeared in the FT, that the Fed would loose 200 billion US$, when inflation comes back again. Interest rates could increase by 100 basis points and the US central bank would be bankrupt according to US-GAAP.  For them the Fed’s Faustian Bargain with the Mephisto “inflation”. For us the SNB money printing is a even lot more risky than the Fed’s Quantitative Easing. The graph shows where the Swiss problem lies:

Money Printing of Major Central Banks

Money Printing of Major Central Banks (Source Guggenheim Partners)


The SNB’s ratio of printed money to GDP is a lot higher than the one of the Fed. In case of inflation the Fed’s losses of 200 billion USD amount “only” to 1.2% percent of the US GDP. It would imply, as Guggenheim Partners state, a bankruptcy in terms of  US-GAAP. But still the Fed will be refinanced by the generous US tax payers.

The risks for the SNB, however, are eight to ten times higher: based on current FX reserves, it will cost at least 10% of the Swiss GDP,if Swiss inflation picks up and the Euro crisis will be not resolved till then.

As opposed to the ECB, the SNB only buys high-quality assets, mostly German and French government bonds. However for the SNB the assets are in foreign currencies, for the big part they are denominated in euros. FX rates move a lot more quickly than American government bond yields do. This is a risk the Fed does not have, and the Bundesbank neither, as long as the euro zone stays together.

Further Fed quantitative easing drives the demand for gold and the correlated Swiss francs upwards.  Sooner or later this will pump more American money into the Swiss economy and will raise Swiss inflation. At the extreme a Quantitative Easing number XXL will bankrupt the SNB or force the tax-payer to bail out the SNB. This might raise the currently low Swiss public debt to levels similar to Germany or France.

bernanke draghi Mephisto

The same applies for ECB printing and purchases of peripheral bonds: This will drive money out of the euro zone and out of Germany into Switzerland. Therefore the SNB can still hope that QE3 and ECB peripheral bond purchases never come. For the SNB these two are the Mephistos: Bernanke and Draghi, the ones who promise easy life based on printed money.

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Crisismode's picture

Just a simple question, No Agenda . . .

I remember ZH, back it the day

When it first started.

There were LOTS of really intelligent Market guys,

who made really intelligent observations about managing money.

Where did they all go?

Why are there so fewof those guys here anymore?

We seem to get a bunch of people ranking on stuff that they know they cannot change.

Why is that?

fonzannoon's picture

maybe the smart market guys figured out what a joke this whole thing is and cashed out

Ahmeexnal's picture

SNB has an ace up it's sleve: GOLD SWISS FRANC.
First one to go back to gold backed currency wins.
Seems like the AuCHF has several laps advantage over the rest.

CrazyCooter's picture

The OP is spot on. Cheeky Bastard used to be my favorite poster. While many classics have hung around, most of the classic posters have silenced themselves. Maybe, I suppose, they yare gettin' down on the mountain ...

In investment terms I mean ... only the nut jobs would be all literal like that ... yeah, that's you DCRB ...



P.S. TD(s) by all means pulls the weight around here. I sitll try to keep up. I come to ZH to get schooled. I am not sure why, but ZH is brain crack for me.

P.S.S. I wish Corb visited my town. If you get a chance to see him in concert, please do so. He is an amazing artist. Here is a couple great tunes that make my point:


NewWorldOrange's picture

"maybe the smart market guys figured out what a joke this whole thing is and cashed out"

Plenty of ways to cash out in the market even when it's become a complete joke. CB insanity is creating a lot of once in a lifetime opportunities, especially for currency traders. At some point, the Swiss will be compelled by reality to end the Euro peg. When that happens, EUR/CHF is going to fall off a cliff. They're fighting like hell to maintain even the 1.20. It seems pretty near impossible that EUR/CHF will rise, and almost certain it will fall at some point in the near future. It's like playing a lottery where the odds are in favor of your eventually winning. Just sayin'

Another example (how to cash in on the inevitable Spanish bailout coming soon):

Dr. Engali's picture

Maybe it's because with this much central planning we don't have "markets" to comment on. There used to be a lot more to the markets than just BTFD, and listening to fed speak.

Michael's picture

Oh great. ZH is telling everyone my secret plan to collapse and destroy the Fed. Now everyone knows.

fonzannoon's picture

At least we have ted baker. he is like a warm blanket in all caps screaming at me before i go to sleep

Dr. Engali's picture

Yeah he is yelling in the next post too.

Ar-Pharazôn's picture

even communist Russia had a stock market :P

Ghordius's picture

LOL - yes. For example lots of Hedge Funds Champions are quitting because they claim that they don't understand the system anymore.

My take (and I'm not alone): the last 40 years were fundamentally different. This is the "Return of the Political Economy" we are witnessing.

NewWorldOrange's picture

The "system" that made the hedge fund champs so much money was one big self-fulfilling prophecy. They all worked together, in a sort of (mostly) silent conspiracy, along with most of Wall Street. When the little guys started piling into something, the hedge fund guys/Wall Street all took that as a signal to dump everything. Once they'd driven the price down to the point that the little guys panicked and sold, that was their signal to buy again (BTFD). It hasn't changed, and probably never will. Problem for them now is, all the little guys are already out. The few still in are in long term hold mode. So there's no signal for the big players to sell or to buy. Hence the sideways trading and amazingly low volatility given what's going on all around us.

Those fucking idiots are mostly too stupid to trade in any other way, and even when that "system" worked (when plenty of little guys mired in the greed/fear cycle were available for fleecing), they rarely outperformed the S&P. Now, with no little guys to fleece, game over.

CB intervention is creating huge distortions in currency markets though, and like everything else, a lot of things have reversed and are bass ackwards now. A little "smart guy" can make a lot of money trading on these distortions.

DrunkenPleb's picture

People forgot the first rule of fight club: the results now speak for themselves.



MeBizarro's picture

Generally agreed.  Way too many guest commentators on here who have zero credentials and almost no experience in what they are writing about especially in regards to energy, healthcare, agriculture, etc. 

q99x2's picture

Oh this must be my lucky post. I got the camel toe. Its been a while.

Markets died. Took the Guru high end stuff with it. I think they are still here (the gurus) but all the technical stuff isn't really that applicable since we have the Goldman Sachs, the Ben Bernank and the JP Morgue. Add in the HFT and QE and the relationship between markets and the underlying equities has been removed. The Chinese won't even buy into US markets because they are rigged.

Really liked this article BTW.

RockyRacoon's picture

I've been here a little while and I'm no market guru.  Just a grunt trying to make ends meet.  Yeah, there is a lot of digging thru piles of dung in the comments to find a few digestable morsels, but it's worth the effort.   Although it's getting more difficult day by day.  The former comments are correct in my opinion; they've seen the future and it ain't bright.  Perhaps they've moved to greener pastures -- real pastures with real dung, real live stock, maybe some chickens and stuff.

AnAnonymous's picture

Where did they all go?

Why are there so fewof those guys here anymore?

We seem to get a bunch of people ranking on stuff that they know they cannot change.

Why is that?

For 'Americans', all is situational.

Maybe, they were 'Americans' out of job (they were freshly fired from their previous job due to 2008 events)

Maybe, they were 'Americans' freshly graduated, waiting for a first job.

Crisis looked awful as they were the wrong side of it.

Later, they found a job and they are once again on the good side of 'Americanism'. Therefore the crisis is no longer that terrible and they prefer to hang around with peer people, that is probably solidly established 'american' middle class.

They no longer want to waste time on this site as from their newly acquired perspective, it is full of un peers, people that share little in common with them.

Added to that, as 'Americans', they probably felt empathy for people in here when they were on the same boat. Now, they are on a different boat and might feel disgust for 'Americans' in here.


For 'Americans', all is situational.

Apostate2's picture

You have made it clear as to what floats your boat. 

vast-dom's picture

just to put this in perspective and re: tyler's post last month on the etf known as TBT:


if " Fed would loose 200 billion US$, when inflation comes back again. Interest rates could increase by 100 basis points and the US central bank would be bankrupt according to US-GAAP", then TBT > $250

EasterBunny's picture

Does the Fed have to Mark to market? How about they 'hold to maturity', then an increase in yield does not necessarily mean a decrease in the capital value of the bonds. Anyone know if this also works for Fed accounting?

fonzannoon's picture

somehow i just don't think the fed is going to lose to a leveraged etf. that etf will get corzined long before

vast-dom's picture

don't think. i did that for you in a basic logic exercise.

fonzannoon's picture

you take your logic i will use common sense. 

Dr. Engali's picture

What is keeping the BoE from blowing up?

fonzannoon's picture

it will. thats a few pages down in the script i guess. 1698 bitches...come on 1700...

This is the end's picture

Time for the foot to come off the pedal and redirect efforts towards cooling down commodities, oil, gas, silver, grains!, all getting too high for a re-election campaign...look for stocks and commodities to fall soon as they ease off the accelerator. Otherwise they might get accused of causing inflation!

Ted Baker's picture


Urban Redneck's picture

I think among the Swiss the farmers are doing just fine- rich government subsidies and rampant price inflation for those who have to shop in Swiss grocery stores...

Mephistopheles's picture

Dr. Faust would not have made such a foolish bargain; unless of course he could render another's soul to perdition as payment.  Dr. Faust's bargain was honest, this is not. The citzenry will endure hell in the end, while the ultra-wealthy will accumulate more.

AnAnonymous's picture

Wealthy will accumulate more.

But it is only a side effect.

The primary goal is to ensure that what middle class can be saved is saved.

There is a very large breaking apart movement going on right now in the 'American' middle class.

Earth's resources are no longer enough to maintain and expand the current 'american' middle class.

So some parts are falling around.

The goal is to ensure that the resources freed by the falling around middle class is re allocated to the remaining middle class so that they keep enduring and feel stronger.

Indeed, the 'American' upper class will take its share as they organize the salvaging of the 'American' middle class.

But the ultimate goal is to save what middle class can be saved.

akak's picture

Why don't you tell us again about how your "US Citizenism" was responsible for the environmental degradation and societal collapse on Easter Island in the late 16th century, decades before the first European settlers arrived in what is now the USA, and almost two centuries before the USA was founded as a nation --- I really like that one.

AnAnonymous's picture

Nice reframing.

From the destruction of the Eastern Island to the environmental degradation and societal collapse...

What is next? Going to transform it in how Eastern Island population got their first cold?

'Americans' and their impotency to face 'Americanism'

And they wish 'Americanism' to spread to all the world.

What an advance for humanity...

robertocarlos's picture

I sided with the lone deflationist on ZH early on and I'm just waiting for the crash. I have nothing of importance to add.

Zero Govt's picture

Ah memories.. those early days when deflationists were as rare as hens teeth and mere mention of the 'D' word at ZH had the hyperinflationists coming down on you like a ton of bricks

How times change

..even Gentleman Jim Sinclair who has "hyperinflation" plastered all over his toons says what they really meant was hyperinflation of the currency but deflation in the economy.. yes course they did Jimbo!

Has Turd Ferguson come off his hyperinflationary soap box to preech a bit of deflation yet? You even see the 'D' word mentioned at the Bullion Banks hyper front sales office, King World News

eddiebe's picture

Nothing linking to gold wouldnt fix.

Zero Govt's picture

did Gold coin fix the demise of the Roman Empire? did it do up to Nixon renaged on it? ...did it save Sterling? wanna list as long as your arm that Gold money doesn't save anything or anyone?

the problem with our money throughout history is it has been monopolised by the State. Monopolies destroy value (or anything they touch)

The solution is a free market in money, not what money (tokens) are backed by

Dogbark's picture

Bribenanke to Drugy - We can create a shortage of paper by printing so much money. D to B - No, we'll cut on toilette paper and will use money instead.

bob_dabolina's picture

This sucks.


fredquimby's picture

Many people fear the a similar bust of the Swiss real estate bubble like in the 1990s.

But there were no "escaping" Brits, Yanks Chinks or Indians back in the 90's. You will have to stop THEM snapping up the Swiss property they are hoovering up before any theoretical bust may arrive....

Colonel Klink's picture

You didn't blow up that economy!  Government did!


andrewp111's picture

The Fed can't go bankrupt. It will never realize losses on QEx either, because it will hold all bonds to maturity. None of them will ever be sold at a loss. They simply roll off over time.

Cojock's picture

Further Fed quantitative easing drives the demand for gold and the correlated Swiss francs upwards.  Sooner or later this will pump more American money into the Swiss economy and will raise Swiss inflation.

Since when could dollars be spent in Switzerland?

When dollars are exchanged for CHF this affects the exchange rate and it is only after this is done that spending on Swiss consumption (or property) can take place, neither of which is too easy from abroad.

In order for inflation to be caused in Switzerland there has to be a transmission mechanism to Swiss consumers, and in the case of retail prices this has historically been a fiscal phenomenon, not a monetary one.

However, post ZIRP the mis-selling of funds to muppet 'inflation hedgers' by investment banks has caused the very inflation these passive investors are trying to avoid.

You couldn't make it up...but they did.