Tuesday, September 25, 2012

SNB in a Pickle


An absolutely wonderful story came out today. The issue is the Swiss National Bank (SNB), its policy of pegging the Swiss Franc to the Euro at 1.200 and the huge reserve increase this has caused. More broadly, this is a story of Central Banks, their inventions in the markets, and the negative blow back results that these interventions cause.


This matter has been discussed in a number of newspapers/emags:


1) FTAlphaville

2) Telegraph

3) NZZ

4) WSJ


A quick summary of this fast moving story:


Standard and Poors (S&P) came out with a paper that said that the SNB had bought Euro 80Bn of core EU country bonds the past few months. S&P went on to blame the SNB for the unusual activity in the EU bond market that followed. Two-year debt instruments of Germany, Austria, Netherland and Finland went into negative territory. At the same time, bonds in Italy and Spain tanked. S&P flat out point the finger at the SNB:


SNB bond-buying is “exacerbating” the gap between borrowing costs for stable countries like Germany and the rest of the 17-nation euro zone.


Some perspective on this. What is the largest single economic threat the globe faces today? The clear answer is the funding market in the EU. Extraordinary steps have been taken by the ECB to contain the problems. More extraordinary measures are being introduced over the next few months. In spite of all that has been done, it is by no means clear that the problems can be contained.  If they are not contained, the global economy is headed into a very nasty spell. And the Swiss National Bank is adding to the problem. According to S&P, its actions are directly undermining the entire global financial system.


In an extremely unusual move, the SNB fired off a response to the S&P report within hours of it being issued. Not surprisingly, the SNB denied all of the accusations by S&P:






I think this was a very dumb move by the SNB. By issuing a denial, it has opened the door. I (and dozens of others) are all going to cry:


“Prove It!”


The SNB does not break out its bond holdings. The numbers are bunched with central bank deposits. At this point no one knows if S&P is right in its assertions about the SNB bond portfolio. But that doesn’t really matter. If the SNB was loading up on deposits at the Bundesbank, it had the same consequence as direct purchases of government debt; it drove interest rates down. In this case rates went below zero in Germany while they soared in Spain.


The S&P report is an accusation that the SNB facilitated capital flight from the periphery to the core. By its actions, the SNB exasperated the problems. This is a very serious charge. I don’t think we have heard the last of this. The SNB has to step-up and prove that it is not contributing to the monetary problems in the EU. A formal announcement has to follow. Information has to be provided that attempts to blunt the S&P accusations. I believe that another SNB response is likely, as S&P has called its bluff. After the SNB refuted the information, S&P quickly came out with a response that they were standing by its numbers:


We stand by the conclusions of our report. We believe the assumptions underpinning our analysis are reasonable.


I don’t think the SNB can prove what it wants to prove. I think the evidence will show that the SNB absorbed huge amounts of capital flight from the south, and then passed it along to the north.


There is a lot at stake here. The conclusion from the SNB affair is that Central Bank policy in one country has negative consequences to other countries. This is an old story. But this time the EU is faced with a big problem with Switzerland. They are going to the mats to save the Euro, and the Swiss are scrambling their eggs. Something has to give.


The solution is simple. When the SNB gets another E10Bn from Spain or Italy, they have to put the money back into the bond markets of the countries where the money came from. That would address the EU complaints that will be forthcoming. Of course, that would put the SNB in a pickle. I don’t think the SNB (or the Swiss people) is willing to buy Spanish sovereign debt. The “Peg” policy would have to come into question under these circumstances. I don’t think the Swiss will fund Spain.




I have one gripe with the S&P report. It said that the issue with the SNB was “unnoticed”:


Largely unnoticed, Switzerland’s decision to stem the appreciation of the Swiss franc has led to a de facto recycling of funds from the eurozone periphery to its core, via the Swiss National Bank (SNB).



Unnoticed you say? I said exactly what S&P said today way back on August 7: (Link)


The SNB invests its hoard of Euro reserves in short-term German government paper. They have avoided holding their reserves in debt instruments of Italy and Spain. This has influenced market rates in Germany; two-year yields have been at or below zero for months as a result of the Swiss. This has mucked up the European bond markets as it results in a huge spread between German and Spanish yields. The Swiss intervention is adding to the stress in Euro funding markets.


Izabella Kaminska, at FTAlphaville, said much the same on September 7. (Link)


You can’t get no respect.




  1. Hi Bruce

    I never miss your postings.

    Keen insight and always timely.

    What other blogs do you read?

  2. Bruce, I respect your wisdom and enjoy your insights. My admittedly limited perception is that, while the Euro countries have acted in their own individual best interests, with the Greeks spending the Germans’ money to buy German goods, etc., the Swiss have been their customary industrious selves. Then, when so many Fiesta-Siesta countries, and their lenders, find themselves in a pickle, their citizens pour their savings into Swiss Francs, because the Swiss are fiscally responsible, whereas the depositors’ governments (” ,,, going to the mats to save the Euro … “) and populations are not. The Swiss, “collaterally damaged” in this EuroFarce (which seems to me to have been doomed from the get-go), try to keep the exchange rate where they can continue to export their products. Why do I find myself rooting for the Swiss, and why do I feel you are not?

  3. The Aug 7 link is not working

  4. To be fair… they do say “largely” unnoticed!

    : )

  5. I’d like to second Mike’s comment. It seems to me that the Swiss are the only ones in Europe that have at least =tried= to act responsibly; i.e. not printing cash ’til the bearings smoke. How come the only people showing any restraint at all are the Bad Guys all of a sudden?

    We need the bad debt to default and clear. Yes, I know.. That means deflation and there will be a great wailing and gnashing of teeth. So be it. You gotta’ eat your peas, right?

    From a business standpoint, the current paradigm is absolutely paralizing. Someone… Pretty please… With a cherry on top… Jiggle the f’ing handle.

    • Swiss not printing? They are printing like mad. For each Euro1.2 increase in reserves, the SNB has printed 1 Chf.

      Are the Swiss evil? No. They are doing their best to protect their own interests in very troubled times.

      Are the Swiss adding to the problems in the EU more broadly? Yes they are.

      So if you are in Italy/Spain you think that Switzerland is part of the problem. If you are in Brussels, working for the ECB (Draghi), you also have to think the Swiss are part of the problem. If you live in Switzerland you think all is well, and the rest of the EU is the problem.

      This piece was about conflict of interests. What is good for the Swiss is not good for the rest of the world. I think they call that, “Enlightened self interest”.

  6. I stay with Usonian and Mike and I was telling that long ago: swiss are not fault – eu look to the mirror. But I think SNB should have rather buy gold, silver and oil reserves for their country.

  7. Does the SNB have the option to hold Euro currency directly, instead of having to hold bonds?

    It would solve the problem of having the liability tied to a specific country, while maintaining the exchange rate necessary for trade.

    It would also be easy to sell to the public since the yield would be zero, not negative.

  8. This has mucked up the European bond markets as it results in a huge spread between German and Spanish yields.

    Would rates for Spain be lower in any case? If you think so … then “prove it”. Who except speculators — or those willing to gamble on getting the Ponzi interest long enough until the whole thing collapses — would want to own Spanish debt anyway? Do you seriously believe they will ever pay the money back?

  9. Meh, so those with capital in Spain are buying Francs and the Swiss in turn are buying German bonds with all their Euros. Seems to me the Swiss are in just as big a mess if the Euro goes boom. Suppose the Swiss didn’t exist and/or “those with capital” in Spain would just buy German bonds directly. This whole charade is nothing more than rearranging the deck chairs on the Titanic. The problem isn’t all the re-arranging – Spain is bankrupt because they spend more money than they receive in taxes; actually, for the same reason virtually every Western nation is on the Titanic, it’s just that some are at the bow and will sink first, and some are at the stern and will sink later, but sink they will.

  10. In a world of zirp and money printing, in triing to keep the western cummunity consuming, it seems a bit cheap
    to blame SNB policy for the political and financial desaster we are living in. Does S&P have ideas how to get
    out in a safe manner ?

  11. If they let go of the peg and go to a float the early capital flight-ers are going to make out like bandits.

    • The “first money” into ANY devolving-to-zero situation ALWAYS makes out “…like bandits”. It’s one of Minor Axioms that accompany The Other Golden Rule.

  12. That’s hilarious! Maybe the S&P read your article and decided to dust it off, get some supporting data, and re-issue it as their own. ;^)
    Desperate times require desperate measures!

  13. @Mark T They won’t let it float. Too much at risk from traders and Southern Europeans.

    With their backs to the wall, they’ll have to fabricate, and come up with another way to keep the peg the the ECB finds acceptable.

    After all, the ECB, the IMF, and the individual European Central Banks all massage the data, and cook the books when their backs are against the wall. One of the German Finance Ministers even admitted that they did not always tell the public the truth. Surprise! Surprise!

  14. @tom “…Spain is bankrupt because they spend more money than they receive in taxes; actually, for the same reason virtually every Western nation is on the Titanic…”
    Perhaps, to be a little more exact, the people of the PIIGS nations did not get an opportunity to directly approve of the massive indebtedness. In Greece’s case they spent themselves into a hole on the Olympic Games in 2004: “…cost overrun and debt from Athens 2004 substantially worsened Greece’s financial and economic crises 2008–12….” – Wikipedia Of course, the banks financed it and German engineers benefitted form it! LOL

    The politicians used “enticements” to rope the public into receiving entitlements that the tax base could not support – George Bush’s drug rider for Social Security is a perfect example. He used it to buy votes and pay back big pharma for it’s campaign support at a time when it was well known that SS/Medicare/Medicade were in dire straits. Congress passed it for the same reasons, even though the U.S. couldn’t afford to pay for it long term.

    Obama is no better. Almost all of congress and the president need campaign contributions and public support, and they’ve bought it with borrowed money that the tax base can’t pay off without raising taxes. Now it’s getting time to tell the lower 80% of the population the bad news – time to pay up suckers!

    Gee, I wonder why the public is blaming those great polticians???

  15. ” By its actions, the SNB exasperated(sic) the problems.” The word you want, Bruce, is “exacerbated”. Perhaps a quick proof-read by a professional writer might be in order for your otherwise-excellent articles.

  16. Hi!, Patrons Of Bruce Krasting Et Al:

    I’ve been looking to find anyone who wants to pay my bills for me but so far I’ve found way too many sane people who refuse me. Why do you think that is everybody? After all I’m a nice enough guy and know lots about having a gay old time in town on Saturday nights using my Visa & Master Cards. Any volunteers out there who want to help me from cyberland USA?


  17. “Exacerbated,” not “exasperated.” Please!

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  20. Hi Bruce, here is the prove you are looking for.

    Standard and Poors is mostly warming up old rumors without foundation and completely wrong numbers.

    It might be true that Swiss banks absorbed some capital flights from the periphery, but German, British, American banks did too.
    Most inflows came from Swiss companies that repatriate profits. The SNB did not modify prices significantly.

    The title:
    “Is Standard and Poor’s a Rating Agency or a Rumor Agency ?”

    Read more http://snbchf.com/2012/10/is-standard-and-poors-a-rating-or-a-rumor-agency/