When Switzerland has a currency crisis it is because of the flood of money coming into the country, not because investors are fighting to withdraw funds. But the Swiss have been here before and history says the problem won’t go away easily.
With America and the Eurozone in such difficulties, Switzerland has become a safe haven for the world’s hot money. People have rather deposited their funds there than risk it elsewhere, even if interest rates are nil or negative. That has pushed the Swiss franc ever higher, making the country expensive for tourists and pricing its exports out of the market.
The country’s central bank has thus acted to put a floor on the franc of 1.20 to the euro when it had fallen by 20 per cent this year to stand at almost parity with the single currency. In a terse statement, the Swiss National Bank said it “will no longer tolerate an exchange rate below the rate of Swf 1.20”. The bank is aiming for “substantial and sustained weakening of the Swiss franc” and says it is prepared to buy foreign currency in unlimited quantities.
If only euro members such as Greece had that problem – or the unlimited reserves to intervene in the market. But as Mrs Thatcher famously said, you can’t buck the markets. So long as Switzerland is regarded as a strong economy compared with the rest of the world, the pressure will remain on the franc.
And as a reminder that this is a long term problem, Switzerland set a floor against the German mark at the end of the 1970s because its currency was relentlessly rising – even though interest rates were negative then too. The result was soaring inflation in the 1980s. The mark then, the euro now – it is the same problem and is likely to prove equally ineffectual.
There are other safe haven currencies, but since Japan acted to protect the yen this year, the flow of money into Switzerland has intensified further. The world may now have to learn to love China and the renminbi.
But how limitless are Switzerland’s reserves?
The central bankers in Zurich and Berne have been selling francs for weaker currencies over the past year without success. Indeed, they have lost Swf30bn in the past 18 months, the franc’s rise increasing the losses. The Swiss National Bank has thus been unable to maintain its dividend to the local government departments that own most of its shares, hindering the public sector’s efforts to boost the economy. Still, I bet Athens would swap its problems for Switzerland’s any day.