Switzerland – Chapter 2

Switzerland – Chapter 2
David R. Kotok
January 16, 2015

In the wake of Switzerland’s removing the cap on the Swiss franc’s value against the euro, debt owed by non-Swiss agents has become an emerging issue. That debt, denominated in either Swiss francs or in euros, is secured by collateral outside of Switzerland. Is this an unfolding foreign-currency-related debt problem? The answer appears to be yes.

Russian businesses secured loans denominated in low-interest foreign currencies, including the Swiss franc. The franc was then pegged to the euro. The collateral for the loans depended on an assumption of $100 oil and a Russian ruble that has since plummeted. It appears that some of these agents now cannot pay.

Real estate speculators in Warsaw pledged their real estate to secure loans in Swiss francs. Why? The interest rate was very low – much lower than if they had borrowed in zlotys. Or they borrowed euros with the assumption that the Swiss peg against the euro would remain in place.

These borrowers around Europe and elsewhere in the world pledged collateral, took on foreign-currency risk, and based the risk-taking on the commitment of the Swiss National Bank (SNB) to maintain its currency peg at 1.2 francs to a euro. Many of these borrowers are now sweating bullets.

Markets around the world are reacting in fear of contagion that could result from these debts. Is the reaction rational? We shall find out in due time.

We do not know how much debt there is, who the borrowers are, or what banks and intermediaries are involved in the loans. We do not know what supervision and regulation have been applied, since this is activity that is mostly outside the US and thus not supervised under the post-Dodd-Frank regulatory regime.

Markets can handle good news, and they can handle bad news. Markets have trouble, however, with uncertainty. The pressure on stock markets and the volatility that has spiked due to the SNB’s move are the results of rising uncertainty about the foreign-currency-denominated debt and abrupt changes in central bank policy.

The Swiss have punched new holes in their cheese. They have boiled their chocolate so that it smells bad. They committed to a course, reversed themselves, and have now lost their credibility. This is the second governor of the Swiss central bank who has suffered a loss of credibility. The first one had to resign because a member of his household was allegedly trading a foreign currency position against the euro peg. The second governor has derailed billions in loans and pressured his citizens through his unexpected policy change.

When one central bank loses its credibility, all central banks suffer. The burdens on the Federal Reserve, the European Central Bank, the Bank of Japan, the Bank of England, and others have now intensified.


David R. Kotok, Chairman and Chief Investment Officer


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  1. The Peak Oil Poet commented on Jan 17

    i sometimes wonder

    what’s to stop banks simply stealing all of their depositor’s funds?

    really, what’s to stop them?

    every crime they have committed in the past they have got away with

    i mean, isn’t that the next step? Bankers insider trading with their own power to disrupt market

    and then next step just simply striping depositors

    easy as pie


  2. cobaltbluedolphins commented on Jan 17

    “When one central bank loses its credibility, all central banks suffer.”

    You say that like its a bad thing.

    • Concerned Neighbour commented on Jan 17

      Don’t worry, I’m sure this means we’re going to 3,000 on the S&P 500 this year to ensure central banks maintain their “credibility”.

  3. Bob K. commented on Jan 17

    LOL, sounds like sour grapes from the it’s a sure thing crowd. The SNB acted quite rationally. They were in an untenable position, already holding 100% of the country’s GDP in Euros. Draghi dilutes the Euro further then they risk bankrupting their country.

    Forex games by Central Banks are designed to support profligate governments and mercantilistic export policies. Every Swiss citizen was paying an import tax every time the SNB bought Euros and sold Francs.

    Mr’ Kotek would have been more impressive if he called this move instead of being a cheerleader for the elite policies that disproportionally benefits him. By the way, I will help him write his next article; the Yen is next

    • Futuredome commented on Jan 17

      Please, your policies are quite elitist as well, giving capital owners dictatorial control over the rule of law. Put it this way, there is nothing rational by fast moves in monetary policy. If you don’t want to follow the Euro through its devaluation, say so and move the Franc upward over a period of time to people can adjust. Just doing it abruptly does little except cause uncertainty and useless panic.

    • Concerned Neighbour commented on Jan 17

      How is it elitist? What, the banks and speculators didn’t get a chance to front-run central bank policy for a change? My word, what is the world coming to? Contrast that to the situation with the Fed where governors practically sing lullabies to the bankers on a nightly basis.

      BTW, if it were such a panic, why did most global markets surge yesterday? All US and European markets – and I use the term loosely – are up significantly from when the announcement was made. But then I forget myself: in the “new normal”, stocks going down 0.00001% is called “panic”.

    • Futuredome commented on Jan 17

      because forcing people to accept a dialect is elitism. Paul Krugman and Rand Paul are both elitist shrills. One works for the scummy landlords, the other for the rentier leech.

    • Futuredome commented on Jan 17

      elitism is a linear dialect. he was spewing anti-nation state, pro-rentier/globalist scheming. Lets stop government from doing anything so their capital/property owners can control the rule of law absolutely. Paul Krugman and Rand Paul are both elitists. One serves the scumy landlords, the other the rentier leeches.

      the SNB is in the wrong. it was wrong to peg and it was wrong to unilaterally unpeg without a bit of warning. the so called “losses” are practically nothing. that is not the point.

  4. Orange14 commented on Jan 17

    The NYT reported today that CITI lost $150M because of this. I wonder if other US banks suffered losses as well. This is yet another argument that bank trading needs to be done separately from insured deposits. I don’t want to be on the hook (as a US taxpayer) for this stupidity! I agree with Bob K on the post.

  5. b_thunder commented on Jan 17

    “The burdens on the Federal Reserve, the European Central Bank, the Bank of Japan, the Bank of England, and others have now intensified” What burdens? The burden to make sure that the international speculators NEVER lose a single penny or centime? I really don’t see any other burden.

    For the past 6 years (and in case of the Fed for 14 years, since 2001) the Central Banks have been trying to achieve “growth” by creating the “wealth effect” (i.e. raising asset prices) to such a degree that the wealth “trickles down” to the bottom 90% of the households that do not hold investable assets themselves. And of course the CBs have outsourced the “dirty work” to all sorts of speculators: currency, equity, real estate, commodities, fixed income.

    And those speculators have been conditioned by Greenspan, Bernanke and Draghi and now fully expect to get a “heads up” from the CBs (or at the very least from John Hilsenrath) on any policy change. After all, without having such info they would never have driven the asset prices to where they are now!

    The SNB put a gaping hole in the symbiotic relationship between the Central Banks and international speculators. A few specs went bust. No big deal. What the speculators (and really all of us) need to worry about is when one of the “major” Central Banks loses its credibility, and not in a “volunteer” manner as the SNB has, but when the market forces will **force** another CB to go back on its promises. Then the entire market will be staging in real life and real time the scene from “Trading Places” when Duke&Duke go bust. Half of the market will be having a heart attack, and the other will be pleading with the CBs for help, which, obviously, won’t be coming.

    • Futuredome commented on Jan 17

      The US may be growing at about 4% since the second quarter of 2013. You don’t get the kind of job expansion in 2014 without a surge in growth(with the lag).

      Sounds like they already got growth.

  6. Willy2 commented on Jan 17

    This is a VERY good example why pegging one currency to another Always works out badly for all the parties involved. (think e.g. the peg between the yuan & the USD).

    • Futuredome commented on Jan 17

      Yes, maintaining a fixed rate is hard. It was a large reason why the Nixon left gold completely behind in 1971 when the dollar had become a powerhouse.

  7. odnalro zeraus commented on Jan 17

    It is surprising how many “experts” are surprised that the Swiss, by surprise, changed the rate of the Swiss monetary unit, as this type of “surprises” have been going forever! Governments need not pre-announce their intentions regarding their countries exchange rate parity, and in my experience, if you believed their words of guarantee you generally risked being fooled. As a long retired chief financial officer of US multinationals, based in Latin America and Europe, it was “daily bread” responsibility to keep the company protected against currency risk losses in an environment where there were very limited way to hedge the risk, because of government controls or limited market means. Some colleague lost their jobs for their failure to avoid the risk. For as we know, the ole proverbial management dictum # 1 rule : “We don’t want any surprises.”!
    But, who is the SNV suppose to protect – the Swiss franc and the Swiss economy; OR those who are “long”; OR those who are “short” speculating with its currency.
    In a global world, many still have to learn that the denominated currency and rate of the asset or the liability you own is an intrinsic part of its market price and value. Guarded!

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