All of the Swiss newspapers have the same story. The SNB is “actively” contemplating a currency peg against the Euro. I find this information to be bizarre. Over many years of watching the Franc and the SNB I have never seen anything like this before.
Apparently the SNB is reaching out to all sectors of the Swiss economy and politics to obtain “Consent” to implementing the Peg Policy (“PP”). That’s a very unusual way to conduct monetary policy in any country. It’s especially true for the Swiss.
The reason that the SNB is ducking responsibility by getting an unofficial “Okay” from the business and political leaders is that there is a very big risk for the Swiss to undertake a PP.
The Swiss aren’t stupid. The reason that the public result of the PP deliberations is being deferred until tomorrow is that they are waiting for the Merkel/Sarkozy meeting to end. There is some (small) possibility that the meeting will result in a “Nein” by Germany for a broad program to save the EU. The Swiss could not afford to set a Peg on Tuesday morning when there was some risk that a major negative step within the EU would occur a few hours later.
This is just whacky to me. A major historical step in Swiss monetary policy is dependent on a meeting earlier in the day? Have things evolved such that global monetary policy is changing on a day to day basis? It sure looks that way to me. Where could this go?
My GUESS is that the M/S meeting today will be happy talk about long-term budget discipline and a reaffirmation to deal decisively (Not really) with the problems with bigger (But not big enough) band aides. I’m of the opinion that outcome is pretty priced in. I don't think we will see an announcement that there would be a new large (Starts @ Euro 2 trillion) ) pan European debt offering to take pressure off of Spain and Italy. I also don’t see Germany/France folding the tent on the Euro experiment.
IF that is the result then it substantially increases the probability that a Swiss Peg is announced. (That would not be the case in the (unlikely) Nein/Non scenario.
What happens if there were to be a peg? Two shorter-term outcomes that I can think of:
I) The CHF is the “go to” safe have. But not if they peg themselves to the Euro. Some of the money that is currently parked LONG TERM in Switzerland will leave. (I think a lot of the short term hot money has found the exit by now). Where will those long term seekers of of a safe haven go, now that it ain’t so safe? There is only one option, gold. That is especially true for those who have Swiss Francs in the first place. They all love gold. Now they will have to love it more.
II) The next time there is a crisis on the table where will the money go? Not the Swissie. That would be a dead end. So the rest of the hot money will have less of a place to go. Once again it points to gold.
The “next time” I refer to is likely to happen by Friday. We are living day to day.
For the record
I want to say that should the SNB choose to set up a Peg it will not work. It will end with a staggering explosion. I can’t see a “solution” in Europe. Germany will not “Federalize” the debts of the peripheral states. Therefore the problems will not go away. The risks to Italy and France will grow as a result. As that happens, capital will have to move in the direction of Switzerland. That is always how this has worked in Europe. The SNB may buy some time with their Peg and force scared money into gold. But sooner or later the money will flow to Switzerland. This is especially true given that the SNB will be subsidizing the price of the Franc for that hot money.
Should we go down that road the SNB could be forced to absorb 300 billion Euros. The losses on those holding could be staggering for a small economy like Switzerland. In a recent blog I suggested:
The Swiss like to “Double Down”
A Peg would be the biggest double down in financial history.
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I just hear Sark and Merk have agreed to a quasi-fiscal union.
ReplyDeleteMebbe yes, mebbe no. A union needs to tax which is tough in high-tax EU. Somebody has to 'not tax'.
The question is time: would this take less than ten years to implement? What does the fine print say? Is it real or another finance fraud?
Switz has a problem: it's economy is basically renting money. If the Swiss economy is ALL renting money then they face a severe deflationary recession as in Europe in 1931.
Also, gold price is starting to send a real danger signal but more on that later ...
Bruce-
ReplyDeleteWhy don't the Swiss just start expanding their money supply like every other country in the world that's trying to devalue? Can't the Swiss can make a currency bet AND force it into a winner if they are willing to adopt their own ZIRP and if necessary follow Bernanke's lead on creative Franc manufacture?
Why not print money? Because it would cause internal inflation that will cause the poor people not to eat, not to drive. Bernanke told the Japanese his policy would cause inflation, but he has never told the Americans; and up to today, he still has not come clean on this matter. Neither have the other Fed governors, who should know better, as they were with Greenspan who made many mistakes, but as a goal, had tried to keep inflation in check. Why not follow “like every other country?” Worldwide, the bread lines are coming. Pick a name of a country, as the US dollar is the reserve currency. So go ahead, pick any one.
ReplyDeleteHow about we your Europe merely begin broadening their cash supply as with additional region on the globe that is certainly attempting to decrease the value of? Are unable to the Europe can produce a currency exchange wager Along with pressure this in to a winner if they are ready to take up their own ZIRP of course, if necessary follow Bernanke's add creative Franc produce?
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