Five years ago Mario Draghi famously said he’d do "whatever it takes" to save the eurozone’s single currency; this remains a work in progress. Economic growth has gained traction, admittedly from a very low base; unemployment has receded, but is double that in the UK and US. Ailing banks have been ‘resolved’ but bad debts remain much too high in too many of them. The European Central Bank is not alone in adopting unconventional monetary policy. Perhaps they should take a leaf out of the Swiss National Banks’s rule book.
These people have been fighting a different battle, trying to stop the Swiss franc from appreciating against the euro for the last six years and against many other currencies since these were floated in the early 1970s. They have form, having been the first to experiment with negative interest rates in the late 1970s.
Since January 2015 the Swiss National Bank has set its key overnight cash rate at a negative 75 basis points. This eye-wateringly punitive rate has, nevertheless, not stopped those who deposit money at the central bank from hoarding cash. Pre-2007 Swiss private banks reported that clients on average were holding 16 per cent of assets in cash. This rose to 34 per cent post-2008 and today is running at 21.5 per cent. This has resulted in the SNB receiving 970m Swiss francs in interest income over the first six months of this year, a 40 per cent increase on the same period in 2016, and compares with 1.2bn for all of 2015. Nice little earner!
Needless to say, Euroswiss interest rate futures reflect this reality, trading at 100.71 today. Two-year government bonds yield minus 78 basis points, 10-year CONF sovereign bonds minus 7 basis points. Do we care? Yes, in that potentially this same existential threat to finance and the broad economy might affect all the developed world.
Their repeated intervention in the foreign exchange (FX) market, selling the Swiss franc and buying mainly euros and US dollars, has seen the central bank’s FX reserves balloon from just over 200bn Swiss in 2012 to almost 700bn today. This is almost 100 per cent of the nation’s GDP, with the economy growing between 1 and 2 per cent over the period. Over the last decade the nominal effective exchange rate has appreciated by 50 per cent, this summer’s weakness the unusual feature. It’s almost reached the cap they had imposed at 1.2000 Swiss per euro which was abandoned early January 2015 – causing chaos.
Interestingly, the Swiss Market Index, the biggest 20 of the country’s equities, representing 85 per cent of total capitalisation, is trading higher than it was 20 years ago and close to 2007’s record high, which was matched in 2015. Running a trade surplus during this time the services surplus dropped from 6 per cent to 4 per cent of GDP while goods have gone from a small deficit to an 8 per cent surplus. Testament to world class companies such as ABB, Nestlé, Novartis and Swatch. The index also contains Credit Suisse, Julius Baer and UBS banks, which have seen global market share, capitalisation, and serious share price declines.
Although household spending as a proportion of GDP has dipped because of extreme finance, standards of living have been maintained.
Charts for this piece SMI index, EUR/CHF, Conf yield, share price Credit Suisse.
