Sunday, January 18, 2015

Swiss banks face foreign exchange risk

Interesting article that draws the analogy between a strong member of the EU exiting the monetary union, like Finland or Germany, and the Swiss unpegging their currency from the euro.


After years of wondering whether the exit of a small, fiscally weak country like Greece could undermine the euro, policymakers will have to deal with an even bigger shock stemming from the exit of a small, fiscally strong country that is not even a member of the European Union.


Bottom line: we can learn who would benefit and who would be hurt by looking at the Swiss experience, e.g.,

Big Swiss banks fund themselves in Swiss francs, because so many people everywhere want the security of franc assets. They then acquire assets worldwide, in other currencies. When the exchange rate changes abruptly, the banks face large losses – a large-scale version of naive Hungarian homeowners’ strategy of borrowing in Swiss francs to finance their mortgages. 
Though the SNB had given many warnings that the euro peg was not permanent, and though it had imposed a higher capital ratio on banks, the uncoupling from the euro came as a huge shock. Swiss bank shares fell faster than the general Swiss index.

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9 comments:

  1. The Swiss Franc against the Euro
    It seems that the National Swiss Bank didn’t have any other choice. (Salvade, 2015). The cap was put in place in 2011, establishing the Swiss franc at 0.80 euros, to prevent that the Swiss franc is not valued over the euro and negatively impact the Swiss corporations’ export ability. The NSB was making money by buying foreign exchange currencies. The cap against the euro was removed in anticipation of the decision of the Central European Bank to influx more euros in the euro bonds. The Swiss National Bank couldn’t survive by continuing to buy more euros, without destabilizing its balance sheet (Matthews, 2015). The immediate effects were the depreciation of the national currencies of Hungary, Poland and other eastern European countries who are part of Europe but didn’t adhere to its euro policy as of yet, and had debts in swiss francs. In the long term, Switzerland will see a reduction of its exports within Europe, specially to Germany (Salvade, 2015).
    References
    C.W. 2015. Why the Swiss unpegged the franc. http://www.economist.com/blogs/economist-explains/2015/01/economist-explains-13
    Salvade, C. 2015. La Suisse renonce à bloquer le cours du franc face à l’euro. Le Monde.fr. http://www.lemonde.fr/economie.
    Matthews, C. 2015. 3 ways the Swiss National Bank screwed up. http://fortune.com/2015/01/16/swiss-national-bank-currency

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    Replies
    1. The SNB's decision to uncap the franc versus the euro came as a surprise to many people within the world of finance. In a Wall Street Journal article written a few days after the announcement, some within the world of finance lost trust in SNB and were very upset with the fact that no previous warnings had been given. The article mentions that just two days before the announcement, SNB Vice President Jean-Pierre Danthine spoke during an interview with Swiss television about how the cap would remain a cornerstone in their monetary policy. (Maclucas, 2015) Daniel Kalt, a senior economist with UBS, went on to say that "Certainly the 'temporary' reference was missing in earlier statements." 


      Earlier this week Apple announced a two-stage process of selling bonds denominated in francs. Due to the uncapping of the franc against the euro, Swiss government bonds have dipped into bellow 0% yields. Since many corporate debt sales are linked to the government bond yield, borrowing has become much cheaper and helped encourage banks to lend more freely. With a cache of Swiss currency, Apple can repurchase shares and pay dividends without the high tax penalties they would have faced by utilizing overseas earnings. (Edwards, 2015)



      References:



      Edwards, B. (2015, February 10). Apple Sells Two-Part Swiss Franc Bond. The Wall Street Journal. Retrieved from http://www.wsj.com/articles/apple-plans-two-part-swiss-franc-bond-sale-1423559822?KEYWORDS=apple+swiss+bonds
      


      Maclucas, N. (2015, January 20). Swiss Central Bank Credibility Takes Hit With Franc Move. The Wall Street Journal. Retrieved from http://www.wsj.com/articles/swiss-central-bank-credibility-takes-hit-with-franc-move-1421760856

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  3. How can country benefit from Trade?

    From an economic point of view trading among country can help make the world a better place. Also countries can benefit when they import products that are produced more efficiently in other countries. However, international trade can be one of the most controversial political issues. Some of the reasons country can benefit from trade are:

     Help raise standard of living - For instance if a country or a business import goods and/or service from another country at a cheaper cost.
     Product may be a better Fit - Some product may fit the needs that similar domestic is offering or sometimes it may not be available domestically.



    According to economist, David Ricardo “one of the most important concepts in economics is that trade was driven by comparative cost rather than absolute cost. It can be plainly and evidently seen that more products can result in efficiency benefits. For instance the United States of America imports five different types of cars, they did in the 70’s and 80’s, and therefore the countries supplying each goods had doubled. Hence the productive and effective investment spending may result from the country having access to a wider variety and of vehicle. By increasing and complementing overall investment, while facilitating innovation, trade can definitely encourage higher growth.

    Reference:
    3. Frobe, McCann, Ward and Shor (2014) Managerial Economics – A Problem Solving Approach.

    4. De Geus, A (1999) Harvard Business Review - The living company

    5. Irwin, Douglas A., (2009) Free Trade under Fire. Princeton university Press, NJ


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  4. Exchange Rates and Interest Rates

    The recent concerns over the possibility that the U.S. Federal Reserve may begin raising interest rates this year due to the growing economy has helped to strengthen the dollar1. However, the potential of a rate hike has also weighed heavily on equities and the S&P 500 benchmark by causing selloffs as risk premiums may shrink if rates are increased. The slowing global economy has led the central banks of many countries like Japan, Australia, Switzerland and the Eurozone to cut rates and buy government bonds to stimulate growth, but that has caused their currencies to depreciate. “The dollar has rallied this year versus 14 of 16 major currencies, including the yen, pound, euro and Brazilian real (bloomberg.com).1” Consequently, if a rate increase does occur, which may possibly be as soon as in the next five months2, the dollar could appreciate more and foreign demand for U.S. goods could decrease, thereby, causing a drop in prices of U.S. goods that may hurt exporting domestic producers, but help domestic consumers.


    1Source: http://www.bloomberg.com/news/articles/2015-03-10/u-s-index-futures-slip-as-fed-s-fisher-says-rates-should-rise

    2Source: http://www.wsj.com/articles/fed-leans-toward-removing-patient-promise-on-rates-1426014812

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  5. Hi,
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  6. Greece has obviously played a huge role in EURO position, I am happy with such articles, as I am more close to a news trader and that’s where this is so helpful to get success. I am working with OctaFX broker and it’s a lovely company which has all the ingredient that makes us into winner which includes the free analysis and updates for free on daily basis and the accuracy rate is seriously high for me at least above 85%.

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