“In the world of central banking, slow and predictable decisions are the aim.
So on Wednesday 15 January 2015, when the Swiss National Bank (SNB) suddenly announced that it would no longer hold the Swiss Franc at a fixed exchange rate with the Euro, there was panic.
The Franc soared.
On that Wednesday one Euro was worth 1.2 Swiss Francs.
At one point, the next day, Thursday, the Euro’s value had fallen to just 0.85 Francs.
A number of hedge funds across the world made big losses.
The Swiss stock market collapsed.
Why did the SNB provoke such chaos?
The SNB introduced the exchange rate peg in 2011, while financial markets around the world were in turmoil.
Investors considered the Swiss Franc as a “safe haven” asset, along with American government bonds:
Buy them and you know your money will not be at risk.
Investors liked the Franc, because they thought the Swiss government was a safe pair of hands:
It normally runs a balanced budget, for instance.
But as investors flocked to the Franc, they dramatically pushed up its value.
An expensive Franc hurts Switzerland, because the economy is heavily reliant on selling things abroad:
Exports of goods and services are worth over 70% of GDP.(Gross Domestic Product: the value of goods and services produced by a nation)
To bring down the Franc’s value, the SNB created new Francs and used them to buy Euros.
Increasing the supply of Francs relative to Euros on foreign-exchange markets caused the Franc’s value to fall (thereby ensuring a Euro was worth 1.2 Francs).
Thanks to this policy, by 2014 the SNB had amassed about $480 billion worth of foreign currency, a sum equal to about 70% of Swiss GDP.
The SNB suddenly dropped the cap this year for several reasons.
First, many Swiss were angry that the SNB has built up such large foreign exchange reserves.
Printing all those Francs, they said, would eventually lead to hyperinflation.
Those fears were probably unfounded:
Swiss inflation is too low, not too high.
But it was and is a hot political issue.
In November 2014, there was a referendum which, had it passed, would have made it difficult for the SNB to increase its reserves.
Second, the SNB risked irritating its critics even more, thanks to something that happened on Thursday 16 January:
Many expected the European Central Bank to introduce “quantitative easing”.
This meant the creation of money to buy the government debt of Euro-zone countries.
That would have pushed down the value of the Euro, which might have required the SNB to print lots more Francs to maintain the cap.
But there was also a third reason behind the SNB’s decision.
During 2014 the Euro depreciated against other major currencies.
As a result, the Frank (being pegged to the Euro) had depreciated too:
In 2014 it lost about 12% of its value against the US dollar and 10% against the Indian rupee (though it appreciated against both currencies following the SNB’s decision).
A cheaper Franc would, it was believed, boost exports to America and India, which together make up about 20% of Swiss exports.
If the Swiss Franc were not so overvalued, the SNB argued, then there was no reason to continue to try to weaken it.
The big question then was how much the removal of the cap would hurt the Swiss economy.
The stock market fell, because Swiss companies now found it more difficult to sell their wares to European customers.
(High-rolling Europeans still constantly complain about the high price of holidays in Switzerland.)
UBS Bank downgraded its forecast for Swiss growth in 2015 from 1.8% to 0.5%.
Switzerland remains in deflation.
When central banks try to manipulate exchange rates, it almost always ends in tears.” (The Economist, 18 January 2015)
On a personal level, when it comes to dealing with the Swiss Franc a few odd differences become immediately apparent – differences one rarely sees in other countries.
First, one will often see the Swiss buy an inexpensive item, for example, a 2.90CHF cookie at Starbucks, and pay for this cookie with a 100CHF or even a 200CHF banknote/bill.
In fairness to the Swiss, often when one goes to withdraw cash from a Swiss ATM (automatic teller machine) the machine will often spit out only large denominations.
(For example, a 100CHF note instead of five 20CHF notes or two 50CHF notes.)
Try buying a cookie and paying for it with a 100-pound note in Britain or a $100 bill in the US, Canada or Australia, and the transaction will be refused.
Second, the Swiss will often buy that same aforementioned cookie using their debit or credit cards.
Again, most countries would never allow one to pay for such a low amount using a credit or debit card, as each electronic transaction costs the vendor a certain percentage.
Third, as many ATMs only cough up large denominations this can cause a lot of frustration when smaller denominations are needed by other electronic machines.
For example, should one need to buy a train ticket to a destination not too distant and the electronic transfer component on the vending machine is out of order, then you need to have smaller bills, which are not always conveniently at hand at all times when one wishes they were.
Of course, the Swiss defend all of this economic behaviour, whether it be the manipulation of exchange rates or the transfer of large sums for minor amounts or the exorbitant pricing they assign Swiss goods and services as nationalistic and patriotic protection of Switzerland and its economy.
Try, for example, being foreign and attempt to open up a business on Swiss soil.
The bureaucracy and the expense, not to mention rules like a business on Swiss soil must be partially owned by a Swiss native, make Switzerland an unattractive prospect for international investment.
The Swiss claim that high costs are required for the high quality of Swiss products.
As a resident in this land for half a decade, I have found that high quality is true only for some Swiss products and services, certainly not, for all of them.
Some exports remain superior, despite Swiss claims to the contrary.
So, if Switzerland is truly the economic “land of milk and honey”…
Why then do so many Swiss eagerly cross their borders to go shopping or rent homes if they are so intent on national pride and economic protectionism?
On any given Friday night or Saturday, the border crossings from Switzerland to Germany/Austria/France/Italy are insanely active with Swiss clamouring across for bargains.
Witness them DEMAND, loudly and boorishly, for the smallest of purchases, their VAT (value added tax) forms enabling them to profit not only from lower prices but as well be reimbursed a VAT refund from the vendors they frequented.
Yet these same border crossers, often from Cantons bordering on these nations they shop in, will quickly condemn and curse the audacity of these “invaders” living in Switzerland taking away Swiss jobs and corrupting the Swiss way of life with their foreign ways and morals.
The Swiss Folks Party (SVP), a truly xenophobic bunch, remains the most popular political party in the Swiss Parliament, eager to pass legislation curtailing added immigration and making life for resident foreigners increasingly complicated and uncomfortable.
As irony would have it, the Swiss are very sensitive to how the world perceives them…
(After all, reputation affects profits.)
…yet they somehow cannot see why they are perceived by non-Swiss as expensive and unfriendly.
Fortresses are rarely friendly beacons to outsiders.