Even as the whispers that the imposition [11]of capital controls by Greece, which is now running out of both time, negotiating leverage and tax money [12]is just a matter of time, get louder with every passing day if not acknowledged by Greek officials yet, it was none other than one of the supposedly most "rock-solid" central banks in the world that fired a shot across the bow of global financial stability when it hinted that not Greece but another country may be the first to engage in capital controls. The country: Switzerland.
The revelation came during an interview by SNB head Thomas Jordan who, as reported by Reuters [13], told Swiss radio station SRF on Saturday that "the Swiss National Bank is prepared to intervene in foreign exchange markets and has room to lower already negative interest rates if necessary to weaken the franc, the central bank's chairman said. "We are observing the exchange rate situation as a whole. If necessary we are active but as I said we do not speak about our transactions."
Or as Bloomberg paraphrased it "negative rates haven’t yet hit rock bottom." Of course they haven't: by definition negative rates can go down to infinity, although the system will collapse long before the "rock bottom" is hit. The problem is what happens in the meantime. As a reminder, the NY Fed was kind enough [14]to break down some of the scariest possible outcomes as NIRP becomes NIRPer becomes NIRPest and so on:
- if rates go negative, the U.S. Treasury Department’s Bureau of Engraving and Printing [or any other nation's Treasury] will likely be called upon to print a lot more currency as individuals and small businesses substitute cash for at least some of their bank balances.
- I might even go to my bank and withdraw funds in the form of a certified check made payable to myself, and then put that check in a drawer.
- If bank liabilities shifted from deposits to certified checks to a significant degree, banks might be less willing to extend loans, because certified checks are likely to be less stable than deposits as a source of funding.
- As interest rates go more negative, market participants will have increasing incentives to make payments quickly and to receive payments in forms that can be collected slowly
- if interest rates go negative, the incentives reverse: people receiving payments will prefer checks (which can be held back from collection) to electronic transfers
- we may see an epochal outburst of socially unproductive—even if individually beneficial—financial innovation
Then again, as Russell Napier explained simply yesterday, this is nothing more than central bankers losing control because [15]"In a world of currencies backed only by confidence, every failure is masqueraded as success." As a result action becomes rhetoric (something the SNB already enacted when it moves from a credibility-backed hard Swiss Franc cap at EURCHF 1.20 to a "kinda, sorta" rumored 1.05-1.10 corridor), becomes attitude:
The key for investors today is to see behind the masquerade and the mask, the façade of those putting up a front behind a public face, and be able to tell the difference between the soaring flight of reflation and the perilous fall of deflation. The more attitude you hear from policy makers, the more you can be sure it’s style compensating for the lack of real substance and that this is falling and not flying. And as the attitude becomes more high-handed, the lower the altitude gets. The attitude quotient is rising rapidly.
Back to the Swiss and the ever increasing "attitude" and "style" (compensating for any substance) out of its central banker whose concerns about loss of credibility are becoming all too obvious.
In a bid to discourage investors from piling into the safe-haven Swiss franc, the SNB is charging negative interest rates of -0.75 percent on some of the banks which deposit overnight funds with it. Jordan said the negative interest rates are having a "strong impact" to make the franc less attractive, and signalled the central bank has room to push rates lower.
"There is certainly a limit for negative interest rates, but the question is where exactly that limit is," Jordan said.
"However, I believe at the current level of -0.75 percent, the limit certainly isn't reached yet."
Translation: more threats, more style, more attitude. No substance.
But the punchline via BBG:
"When asked about the prospect of using capital controls to weaken the franc, Jordan said that it was not a measure that is at the forefront at the moment."
So at the non "forefront"? Because as everyone knows, the best way to admit the possibility of capital controls is to not explicitly, and unequivocally reject them. That there is even a possibility of capital controls in a central bank's arsenal, and everyone suddenly begins to pay attention.
And then there is the question how one defines a "moment" at the SNB: because when it comes to the Swiss National Bank, the answer is unclear. After all it was two days before the SNB scrapped the EURCHF floor that none other than SNB member Danthine said [16]:
"We took stock of the situation less than a month ago, we looked again at all the parameters and we are convinced that the minimum exchange rate must remain the cornerstone of our monetary policy," Jean-Pierre Danthine told RTS (on January 12 [16])
Then again, desperate times call for deserpate soundbites, because when your central bank is perceived as a rock of stability in a sea of central banks whose credibility is crashing on a daily basis, forced to cut rates to zero or negative to offset the still soaring dollar, and where the fear of a Grexit may lead to a dissolution of the Eurozone and the collapse of the Euro, what better way to eliminate capital inflow than to hint at the nuclear option. And as Cyprus has "successfully" demonstrated in recent years, the blueprint of capital controls to preserve financial stability works wonders (if only for those outside of Cyprus).
Paradoxically, suddenly the question becomes who imposes capital controls first: Greece, where the specter of whoelsale bank insolvency is now raging across the nation, and where a capital lockout may well be imminent, or Switzerland, which knows that the moment Greece is pushed too far and a Grexit is perceived inevitable, is the moment it will be flooded with a tsunami of Euros desperate to find safe haven in a new, Swiss Franc denomination, somewhere deep in the vaults under the Swiss Alps. A tsunami which would crush SNB credibility all over again, and when capital controls will also become inevitable.
Perhaps the best way to preserve some of said credibility, especially if it is already borderline non-existent, is to frontrun capital controls tomorrow, by imposing them today. So keep a close eye on the CHF, and better yet, the USD. Because if Switzerland is suddenly isolated from the global capital system, said Tsunami will redirect itself straight to the central planners at the Marriner Eccles building, who still refuse to acknowledge that decoupling never works, and having a soaring currency in a world in which everyone else is desperate to crush theirs especially when there is some $9 trillion in offshore USD-denominated debt [17], always ends in tears.
