Swiss Central Bank Considers a Peg to the Euro

The policy challenges posed by the appreciation of the Swiss Franc has been a fascinating theme in international monetary economics in recent months: this NYT article reports on a new twist.

35 replies on “Swiss Central Bank Considers a Peg to the Euro”

I would reckon that they would change to a managed float regime like Brazil or China before anything like pegging. So capital flow controls.

In any case I wouldn’t expcect the Swiss to come out of their free floating currency regime unless something happens like the Eurozone breaking up.

“A euro peg “is certainly not the easiest plan to put in place, either politically or legally,” Mr. Danthine acknowledged. ”

Never mind that, what about technically? How on earth could the SNB stop the appreciation of the CHF using methods other than the methods they’ve attempted so far? (Buying huge amounts of FX). Would they have capital controls? Would anything work?

@ Hogan

would have to have ECB involved on the other side as well. Impossible otherwise, but actually quite possible if so.

That may be true in terms of raising a currency – the ECB buys the currency or swaps euros into it, but it is a different ballgame with trying to weaken a currency, no?

Co-ordinated action on the Yen has proved totally ineffective… it is still below 77/dollar despite multiple attempts to shift it.

@ Hogan

there’s been very little coordinated action on the Yen in the last few years, its all be BOJ led, with comforting words coming alongside from the rest. Coordinated action on CHF and JPY becomes a very different issue for the market.

Even assuming that those two attempts were just moral support from the rest of the G7, why would it be any different for a Switzerland that is reaping the fruits of its secretive banking system?

The most effective action I can see the SNB taking would be to lend massive amounts externally to Switzerland to buy physical assets – at low fixed rates of long duration and with an SNB underwritten FX ceiling – basically a no-lose trade for anyone who takes out a loan. The SNB are a long way from that, though.

We, I believe, have a few hotels that we could sell them.

The free floating fx markets have been doing great damage to the worlds physical economies since its inception – the CBs have greater weapons then the above that could reduce these leveraged currencies ability to transform economies into a unsustainable manner.

If the CBs accept that their backers can no longer take much more loot via monetory piracy they may decide to reboot the system towards a investment capitalist model again.
$5,000 – to $10,000 Gold is now a conservative prediction in my opinion.

There’s an easier solution: print lorry loads of Swiss Franc, and use the money to pay for aid in 3rd world countries.

Europe would need to dramatically increase its armaments exports to make that new trade relationship sustainable.

@ Hogan

the March intervention was a few days worth of moral support, mainly due to a fear that they’d have a repeat of what happened post-Kobe earthquake in 1995 when there was massive repatriation of funds into Japan (20% move in USDJPY in a few months). Post-2011 earthquake, long Yen was the immediate “easy trade” everyone was touting, so thats what it was designed to quell. A coordinated intervention, on a broad and sustained basis, has the ability to scare the market off given the broad and basically unlimited resources at their disposal, but its very difficult to get all the major players on board at the same time given the different issues facing different blocs.

Interesting story on Alphaville on how the stronger CHF has not actually translated into more purchasing power for most Swiss consumers…

“its very difficult to get all the major players on board at the same time given the different issues facing different blocs. ”
So, as I said, it is technically very difficult to intervene to force a currency down.

The CPI thing is interesting, but it should hardly surprise us here, what with out own versions of the monopoly supply chain.

Me thinks the CBs want bank credit deposits to flow into Gold & not free floating fiat.
The possibility that the SNB is not sterilizing is quite some news.

“Is the Threat a Bluff?

Just because someone discusses something does not mean the discussion was serious. We cannot tell.

However, we do know what a currency peg requires: To maintain a currency peg, one must buy (or sell) virtually unlimited quantities of a foreign currency, as much as the market supplies, to maintain the desired conversion rate.

Interest rate policy works the same way. To maintain an interest rate target, the Fed (or any central bank in general) must supply or subtract unlimited amounts of currency to maintain its target interest rate. This happens continually.

If the rate is targeted lower than what the market thinks, the Fed or Central Bank must print enough money to keep the target. Likewise, if the Fed sets a rate higher than the market dictates, it must drain as much money as necessary to keep rates to the peg.

Does anyone really think this continual micro-manipulation of currency to maintain an arbitrary interest rate (set by central planners who do not know what they are doing) is a good idea? ”

“Finally, note the relative size of Switzerland vs. all the Eurozone countries. Buying “unlimited” Euros could rapidly get out of hand.

China goes through the same setup to maintain its “widening” peg to the US dollar. However, China does not allow much external trade of the Yuan. ”

“France, Italy, Spain and Belgium have resorted to the desperate measure of banning short-selling of banking stocks in the wake of this week’s market chaos.”

Could this do more harm than good , now that markets have improved?
It is set to last 15 days!!

German finance ministry proposing a naked short selling ban. On everything. No joke.

The problem isn’t the shor- sellers, look at the chaos all those long-buyers have caused over all those years.

@ Grumpy

liquidity has dried up today, everything being quoted gates-wide. Could be a summer Friday, but could be indicative of the short-sell-ban fears. Unintended consequences and all that.

“The 15 day short selling ban (which appears to include all shorts, not just naked ones), includes the following names: April Group, Axa, BNP Paribas, CIC, CNP Assurances, Crédit Agricole, Euler Hermès, Natixis, Paris Ré, Scor, Société Générale. We wonder whether the French AMF is also aware that one can just as easily create identical synthetic shorts by buying puts and selling calls on the names in question or maybe nobody in the French regulatory body has graduated beyond cash products and into derivatives”

“There are those who say the upcoming short selling ban in all stocks in Italy and France, which according to CNBC will take place as soon as after the close today, or in one hour, will be beneficial to stocks. Then there are facts. To those who may have forgotten, on September 18, 2008 the SEC banned the shorting of all financials here in the US. Below is a chart of the carnage that ensued… The same chart is coming to Europe first. End result: 48% drop in under a month.”

“Proving once again the nobody ever learns from the past, and is guaranteed to repeat the worst mistakes thereof, the NYT has reported what Zero Hedge noted less than a day ago when we said that a “Eurowide short selling ban now appears imminent” with a report that “Europe Considers Ban on Short Selling.” What this means is that transatlantic panic is really about to spike, and the next imminent step is a total collapse of European capital markets. European regulators should be bound and quartered for even considering this stupidity which will destroy price discovery and lead everyone to dump their holdings ahead of a resumption of the Lehman bankruptcy PTSD flashbacks. Also making short covering impossible will remove the only natural downside market buffer. Oh well, if they want to blow themselves up, so be it. “

The only inference that can be drawn from the “desperate measure” of the short selling ban is that some nasties are lurking around European banking.
You have to wonder why do it when markets are rising and the only conclusion I can come to is that some results or announcement are imminent which will be dire. The lousy French economic figures don’t appear to be the catalyst.

Anyone know of upcoming financial results that are likely to have provoked this action?

@ Edgar

short sellers, naked or otherwise, provide liquidity for the market, but more than that, government intervention in the markets scares people into thinking that price discovery mechanisms will be distorted or prevented, even if the intervention seems like a ‘good’ idea or is for a genuine reason. For those more into their conspiracy theories, it might also suggest that govt’s are worried about what the state of the bank balances sheets is really like. Remember, we had a short selling ban (we still do i think?) on our banks too…


There are generally too many long-buyers. Short sellers wake people up. It is very risky and you do it on a strong view, not a whim.

Imagine the economic benefits to Ireland of allowing short-selling of Anglo many months before it imploded – to the government’s surprise, surprise which bounced it into bankrupting the state by guaranteeing everything in a panic.

In Ireland the regulator banned the early warning mechanism, and investigated the people doing the warning. He chose to ignore the unlawful share support scheme for Quinn’s cfds. How much do you think this cost the state?

@grumpy – I am only talking about naked shorts not shorts per se. To me there is a big distinction between naked and covered shorts. Maybe massive shorting of Anglo would have simply resulted in the same actions being taken a bit earlier – we will never know.

@Bond. Eoin Bond – I take your point about government interference being not generally a good thing (and we all know that governments and the EU have ‘not always’ chosen the best moves in this ongoing saga). However, we do know that markets sometimes benefit from a few rules too.

Interesting bit from article in NYT….

“By one measure, according to a recent report from the Peterson Institute for International Economics, 90 of Europe’s biggest banks hold 4.7 trillion euros ($6.7 trillion) in short-term loans that must be repaid over the next two years. That burden alone is more than half of the combined gross domestic product of the 17 nations that share the euro currency.

“This problem has become cancerous,” said Stephen Jen, a former economist at the International Monetary Fund who runs a hedge fund in London. “France will not hesitate to fiscalize its banks — but it will be very expensive.”

Just to expand on the intended inference from
my last comment – the government (I think)
and others blamed short sellers for Anglo’s
problems and then banned short selling. However
the short selling was not the cause of Anglo’s
problems and in fact the reverse is true I.e
The problems at Anglo directly caused the short
selling because the market knew that Anglo
were up shit creek without paddle ( Enter FF – could’nt
resist that).
Anyway the point is we have seen all this before
and who was right?

@Desmond Brennan

“There’s an easier solution: print lorry loads of Swiss Franc, and use the money to pay for aid in 3rd world countries.”

That’s actually quite interesting ‘out of the box’ thinking. I just had lunch today with a friend from Nigeria (an honest one with integrity who champions the fate of the poor in that country and constantly receives death threats). He was telling me some stories of desperation there that would seriously make your toes curl. Africa desperately needs help – real help. Could you imagine what a bunch of Swiss engineers and other professionals, completely separated from the national and local corruption in Africa, with a few billion in recently printed Swiss notes could do over there? I’m told that even putting a few train lines in where they don’t currently exist helps commerce to flourish.


Some interesting discussion on short selling and I think worth a new thread. My personal view is that it can only really be justified in areas such as financial risk management particularly e.g. where it’s used to underpin products such as guaranteed personal pensions (the kind of products companies like MetLife and Axa sell in the UK), protecting the value of individual pension funds capital and income. It actually does some real good for the end (individual) customer. Other than that, it’s just gambling isn’t it? Though I should perhaps ‘fess up to making the odd punt on spread bets related to things going down 😉

Anyway, I’m off to my local to watch what will hopefully be an entertaining game of rugby in Bordeaux. C’mon Ireland.

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