SocGen Thinks CHF is the 'Next Safe Haven to Fall'

The Swiss franc has become a 'safe haven asset' during the euro area's debt crisis, along with a number of other peripheral European currencies, especially the Scandinavian ones. Similar to the central banks in Scandinavian countries, the Swiss National Bank (SNB) thereupon instituted a major inflationary policy, including in this particular case not only 'ZIRP', but also the enforcement of a floor rate versus the euro, so as to avert 'deflation' and 'damage to the export industry' – in other words, the SNB decided to risk the value of its currency as well as the formation of a major asset bubble for misguided mercantilistic reasons. Nevertheless, buyers continued to pile into the CHF (one wonders what they were thinking?), thereby 'forcing' the SNB to continue to defend its peg by letting the printing press run 24/7.

Now Societe Generale, based on the idea that systemic risk in the euro zone is receding, thinks that the 'safety premium' may come out of the Swissie.


“The Swiss franc, a currency that has provided refuge for investors since the escalation of the euro zone debt crisis, may be the next safe haven to fall, according to a new report from Societe Generale.

The bank forecasts the Swiss franc could weaken by almost 10 percent against the euro by mid-2014 to 1.35, as systemic risk in the single currency bloc recedes. One euro currently buys 1.229 Swiss francs.

"Systemic risk has faded in the euro zone, and further progress will be made to tackle the solvency issues of euro zone countries, the Swiss franc should lose its appeal as an alternative investment," the bank said.

Further cooperation among European leaders, including fast tracking a banking union, for example, and an improvement in the region's growth prospects would be negative for the currency, it noted.

Recent economic indicators including the latest euro zone Purchasing Manager's Index (PMI) – which rose to a near two-year high in July – suggest a possible turning point for the euro area. "Moreover, the economic recovery in the U.S. and higher global yields will see capital flowing out of safe havens into higher beta and higher yielding assets," it added.

However, there is a risk that the Swiss National Bank may hike rates next year to counter housing inflation, the bank said, which could limit the currency's downside. Switzerland has seen a surge in property prices following the 2008 global financial crisis, driven by ultra-low interest rates.”


(emphasis added)

We're not so sure that there are no longer any systemic risks in the euro zone. It looks to us more like a good helping of lipstick was put on the pig, and that lipstick could wear off anytime. There is an awful lot of Polyanna-type extrapolation involved in SocGen's assessment.

However, it is of course not knowable for how long the markets will continue to pretend that all debt problems have been solved by piling on even more debt. Moreover, as we have pointed out in recent weeks, the recent increase in euro area money supply growth argues in favor of increased 'economic activity', even if such activity ends up consuming even more capital and invites an even bigger bust down the road. So there certainly is a chance that the charade could continue for a while longer.


The Actual Problem

Having said that, there is a far more important reason to worry about the Swiss currency. Simply put, way too much of it has been printed in a very short time period. The monetary base has exploded into the blue yonder and so have Switzerland's monetary aggregates. Below are the most recent charts:



Swiss Monetary BaseSwitzerland's monetary base in billions of CHF – click to enlarge.



Swiss Monetary AggregatesSwiss monetary aggregates M1, 2 and 3. Explanation: M1 consists of currency in circulation, sight deposits and 'transaction deposits', and thus is the equivalent of narrow money TMS-1 in the US. M2 is M1 plus savings deposits – it is therefore akin to US broad money TMS-2, as savings deposits in Switzerland are not time deposits (i.e., they are available on demand). M3 includes M1, M2 and time deposits – click to enlarge.



As can be seen, both the narrow and broad money supply have roughly doubled since the fourth quarter of 2008. Presumably the SNB has some plan to take some of its monetization measures back once the CHF weakens – but then it would actually have genuine deflation on its hands. The idea that it might raise rates to counter the real estate bubble looks perhaps reasonable on paper, but in practice central bankers are usually not happy to preside over collapsing real estate prices, as the collateral for the mortgage loans the banking system has extended will then no longer suffice to cover these loans. We seem to remember that a little bit of trouble erupted over just such an issue in the US in 2007-2008. It seems therefore likely that new excuses to keep the inflationary policy going will suggest themselves to the central bank. 

In the past five years, the SNB has printed as much money as in its entire pre-2008 history. We're not sure according to which doctrine its managers are confident that this isn't going to have adverse consequences. We do however know from experience that once these adverse consequences become manifest, the initial reaction will very likely be to print even more money.

In a way Switzerland's experience is just a microcosm of what has happened elsewhere in the world since the 2008 crisis, so there may be little effect on relative currency exchange rates stemming from the expansion of the money supply as such – we would tend to agree with SocGen that exchange rates are far more likely to be driven by other considerations in the short to medium term, even if these considerations may turn out to be misguided.

However, it should be clear that doubling one's money supply in the space of five years is going to have serious long term effects, none of which anyone will like once they become obvious. Clearly we live in an age of accelerated devolution of fiat money. 



CHF_EURThe long flatlining CHF-EUR rate – 'down' means the CHF is getting stronger. The SNB has enforced a 'floor rate' at the 1,20 level since September 2011 – click to enlarge.




Chart by: StockCharts




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7 Responses to “How Safe is the Swiss Franc?”

  • zerobs:

    The Swiss government would be like the little boy with his finger in the dike, should these banks start collapsing.

    The Swiss Government already has its finger in the dike. The question is which side of the dike they’re on and if their snorkeling tube is long enough.

    • Well, the truth is, that is what all this money expansion is about, floating bad bank debt. The funny thing is if they keep doing it, it is going to continually delever the fractional reserve system and freeze massive amounts of perceived capital into the prior existing money supply, along with any new money supply. Banks need only be able to clear funds between themselves. Governments have taboo laws against holding too much currency and convenience and safety give cause to keeping money in the banks. Only when a bank gets so broke, it is clear they can’t clear across border funds, as in the case of Cyprus, do we see action. The Eurocrats can’t get their Euro wide banking system set up fast enough to cover up this mess. We are in a different world, in that all money is debt, much of it denominated as cross border debt, created through international banking and there is little to immediately expose any of it. The central bankers realize that if one fails, it is a vital link in the chain that exposes all of them. The debts are going to swallow all of us before they are done. Than, as Galbraith said, in the long run, we are all dead. I hadn’t read Keith’s post when I wrote mine, but it is clear the majority understand the problem as a banking problem. The great irony, in witnessing the worldwide game of central bank easing, is the efforts are nothing but the hair of the dog that bit us and insurance we have a stagnant economy until it comes apart and starts anew. A world of overvalued, underperforming or non-performing assets. The story told by Andrew Dickson White, 100 years ago, in Fiat Money Inflation in France, proves some things never change. At least they aren’t forcing parity on gold, yet.

  • This was a bank bailout and had little to do with trade in general. Swiss banks made a bunch of bad loans in Eastern Europe and to continue to allow the Euro to devalue against the swissie would have put these loans and the TBTF banks in peril. The Swiss government would be like the little boy with his finger in the dike, should these banks start collapsing.

  • SavvyGuy:

    > In the past five years, the SNB has printed as much money as in its entire pre-2008 history.

    The older hard-money generation is slowly but steadily being replaced at the SNB by more telegenic types, full of…you guessed it…”accommodation”!

  • Keith Weiner:

    Pater: great article and I did not realize the full extent of the SNB’s monetary abuses.

    I would suggest one thing. This is not primarily driven by mercantilism, though I am sure that’s part of it. I am sure the likes of Nestle and Swatch lobbied for a devalued currency. But the bigger problem is the banks. They have made enormous amounts of loans within the Euro-zone. If the CHF was allowed to rise persistently against the EUR, then one way or another the Swiss banks would take catastrophic losses.

    • Good point Keith, in fact CHF denominated mortgage loans were extended not only by Swiss banks but also by plenty of other European banks, often without properly disclosing the risks to customers. In Hungary the government ordered the banks to eat the losses and indemnified borrowers – the biggest losers there were Austrian banks.

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