Every so often the world’s tectonic plates shift and an earthquake is the result.
Something similar happens on the international currency markets where now and again, there is a correction. One currency comes under pressure, it can take no more and its controllers take drastic action.
It occurred here in 1992, with Black Wednesday, when the British government stopped shadowing the European Exchange Rate Mechanism or ERM. The markets went into turmoil, with investors betting correctly that sterling was artificially high. The Chancellor Norman Lamont tried to defend the pound, but in the end, simply had to concede defeat. It was a humiliating episode for the UK.
Yesterday, the same occurred again, with the Swiss crying “enough” - although their circumstances were the exact reverse of those in which Lamont and his colleagues found themselves in 1992. The Swiss could not keep staving off the tide of money pouring into their country from investors anxious to avoid or ditch the euro.
For three years, the Swiss National Bank had imposed a cap of Swfr1.20 against the euro. That move was introduced in an attempt to stop Switzerland becoming too much of a safe haven. Back then, there were fears the Eurozone would break-up; cash was flowing into Switzerland, and there were real fears the Swiss franc would soar out of control and Swiss exports, which were becoming ever more expensive, would be priced out of the market.
But the cap has not been able to keep the lid on the bubbling Swiss franc. Only last month, the central bank imposed negative interest rates – meaning depositors had to pay to lodge their money in Switzerland. When even that did not dissuade them, the writing was on the wall.
The SNB’s vice-chairman, Jean-Pierre Danthine, said only this week that the cap would remain the cornerstone of Swiss monetary policy. While he was speaking his words designed to dampen feverish speculation, behind the scenes, his colleagues were contemplating a U-turn.
When that came yesterday morning there was chaos. Within seconds, the “Swissie” had climbed nearly 30% against the Euro; other major currencies, including the pound, also fell; Swiss stocks, faced with trying to sell more expensive products overseas (Swiss watches and chocolate became even dearer) also plummeted.
The SNB reduced interest rates even further, by half a percentage point to minus 0.75%. To no avail – investors clamoured for the Swiss franc.
There was anger among the world’s currency overseers. Christine Lagarde, head of the International Monetary Fund, did not disguise her annoyance at not being told.
In the blame game that followed the Swiss came in for a roasting. They should have said, they were behaving selfishly and irresponsibly with typical Swiss secrecy, they’d instigated mayhem when an orderly retreat could have been planned.
The truth, though, is that the Swiss were not the real villains here. It’s hardly their fault if people would rather hold their currency than the euro. They’re a small nation – there was only so much their central bank could do in using up reserves to buy the euro to weaken the Swiss franc (in 1992, the British were frantically buying the pound to strengthen it). Already, in the three years, the Swiss had spent Sfr163 billion in buying bonds in euros.
The last straw for the SNB was the European Central Bank moving ahead with Quantitative Easing, the printing of euros to bolster the single currency area’s economy, and provide a boost to the currency. What surely spooked the Swiss – and caused consternation in the markets – was the thought that the euro QE programme might be enormous, bigger than had been widely supposed. The Swiss were in no position to push back and maintain the cap.
Their reserves amounted to Sfr500 billion, or 80% of their GDP. If the QE was vast, they would be looking at having to spend even more than that, more possibly than 100% of their GDP. This was an untenable position, and that’s when the Swiss threw in the towel.
Those who should receive opprobrium for the maelstrom that is now ensuing, however, are not the Swiss central bankers. For three years, the Eurozone watched the Swiss struggle; during that time, they witnessed money streaming into Switzerland and away from their own currency. The cap was a safety device, implemented in the heat of catastrophe. It could never maintain its grip for long.
It’s the collective failure of the leaders of the Eurozone economies to manage their currency, to find a way out of their disaster that is responsible for the position the Swiss found themselves. With Greece just as fragile as it was back in 2012, France and Italy stagnating, and Germany racked by doubts over the Ukraine and Russia, its largest trading partner, the Eurozone continues to be in an unholy mess.
The currencies storm sparked by the Swiss about turn is a symptom of a deeper and more significant malaise – the failure of the Eurozone to right itself. In many respects, yesterday’s shift was brave of the Swiss – their shares took a pounding, and Swiss boards faced with more expensive exports must have been cursing. The Eurozone bankers, though, should be the ones on the receiving end – they should hang their heads in shame at three years of inaction and impasse.
Now, they’re preparing to act, with their own QE. This, long after Britain launched and completed its own programme. Will it save the single currency?
The Swiss reaction suggests they’re planning a huge gamble. While it may provide a fillip, it’s difficult to see how it can tackle the underlying structural issues – the lack of central tax-raising powers, the inability of the ECB to police the spending of its members and enforce its own strictures. Without that – without discipline being brought to bear – nothing will fundamentally changeReuse content