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SWITZERLAND’S CENTRAL BANK today scrapped a three-year bid to hold down the value of its currency against the euro, in a shock announcement that set off panic in the markets.
Minutes after the bank said it was abandoning the minimum rate of 1.20 francs against the euro, the safe haven Swiss currency strengthened almost 30% against the common European currency.
Here’s how that looked in practice:
Fearful that a strong franc could dent earnings as it makes local products more expensive, investors dumped Swiss stocks, wiping out some 12% in market capitalisation.
The impact was felt as far as in Poland, where 700,000 mortgages are denominated in the franc. The zloty lost a fifth of its value against the Swiss currency, making it even more expensive for Polish homeowners to repay their loans.
“Markets are clearly in panic mode,” IG analyst Andreas Ruhlmann said, adding that he expected the central bank to rapidly shift strategies “to a new one which will better represent the real market conditions.”
Swiss business leaders called the central bank’s decision a disaster, with banking giant UBS saying it would lead to a drop of 5 billion francs worth of exports and knock 0.7% off overall output growth.
“I am at a loss for words,” Swatch group’s boss Nick Hayek told news agency ATS. “What the SNB has sparked here is a tsunami.”
The Swiss watchmaking giant was among top losers on the stock market, with its shares sinking 15% while those of the world’s second largest luxury group Richemont plummeted more than 14%.
A Swiss bombshell
The SNB had since September 2011 been defending the exchange rate floor in a bid to protect the country’s vital export and tourism industries, even buying massive quantities of foreign currencies to do so.
The rate was introduced as the eurozone crisis sent investors scurrying to the safe haven currency. More recently, the Russian ruble crisis put renewed pressure on the franc.
But the bank, which less than a month ago vowed to enforce the exchange rate floor “with the utmost determination”, said today it was no longer needed.
“The minimum exchange rate was introduced during a period of exceptional overvaluation of the Swiss franc and an extremely high level of uncertainty on the financial markets,” the bank said.
“While the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate. The economy was able to take advantage of this phase to adjust to the new situation,” the bank added.
But analysts and investors were stunned by the bank’s decision.
Berenberg analyst Christian Schulz called it a “Swiss bombshell” while Alpari analyst James Hughes said it would wreck havoc not only on currency markets but also equity markets.
“We suspect that the bank will soon need to intervene against the currency to prevent a further rapid appreciation against the euro,” said Jennifer McKeown, senior European economist at Capital Economics.
Panicked Poles
The soaring Swiss franc spread panic among Polish homeowners who have taken out mortgages in the currency, as their monthly payments will jump.
“This is going to be painful,” said Piotr Andrzejewski, a 45-year-old media executive in Warsaw who has a loan of 120,000 Swiss francs, adding that his monthly payment will go up by 70-95 euros if today’s rate holds.
“It’s worse for those who have to sell their apartment today while still paying off the mortgage. Its possible that in some cases the value of the loan will exceed the value of the property,” he said.
Too hard to defend
Market players also said Bern’s move may have come at this time because it is expecting the European Central Bank to launch a massive quantitative easing programme – which would make defending the franc too costly.
The ECB is meeting on January 22, and is widely seen to launch a controversial programme of large-scale government bond purchase in a bid to keep the bloc from sinking into deflation.
Additional reporting Peter Bodkin
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Was Micheál Martin one of the senior cabinet ministers who tried to interfere with #mahon? If so, forget expelling Bertie, he should resign. Sean Dorgan was the party secretary for FF under Ahern as well. It’s time he resigned as well. However neither of these men have an ounce of shame, so they’ll brazen it out, their bank accounts demand it.
http://www.youtube.com/watch?v=62bPIXhXfmY&feature=player_embedded
Michael Martin defending Bertie and his horsey winnings. This man is completely devoid of shame and his moral compass is completely defunct. No wonder he was made FF leader.
If there is even an decent ounce in you Micheal, you will resign and expel Ahern, Burke and the rest of them from the party. Is there even the smallest bit of you that has a concern for this country.
Traitors. FF’ers are members of a party run by traitors, for the benefit of thieves and staffed at the bottom by fools.
Some of the councillors who solicited and received bribes are FG. Whole damn system is bent as are many within it. Others knew what was going on and said nothing…
They are indeed. I refer to FF as a mindset, you don’t join FF if you are in to politics, you join if you want to make lots of money for yourself and your friends/benefactors. That type of person exists everywhere but it does seem to define FF at its core. I disagree with FG politics but at least they have a political vision and belief system. I just really hate their vision
Your comment had me spluttering on my cornflakes Fagan – Fine Gael “have a political vision and belief system”??
FG have no distinct vision from Fianna Fáil, they are Fianna Fáil light in every way, (including corruption, not as bad, granted, but it is there.) I also seem to remember a certain ‘Good’ Taoiseach having questions to answer over his bank accounts, and a director of the associated bank concidentally getting a nice plum job in Brussels… Let he who is without sin etc…
And we haven’t forgotten FG campaining against quangos, yet at the last minute introducing a clause to legislation to allow a minister to overrule appointments…
The system is rotten, it’s not as bad as some other political systems yet, but we need to introduce tough laws and tribunal with teeth now.
300 million – will it result in convictions??
If you are foolish enough to think this is all in the past I suggest that you pay attention the next time your local council is doing a development plan. Still easy to spot the developers friends. And no they are not all FF. Developers are not loyal to any party. They cozy up to whoever is in power. It’s mostly been FF over the past 30 years that’s why so many FF councillors and TDs on the take.
Please note that the payments went to all the big parties not just FF. why are the media covering this up. Are they afraid to upset the Government Parties
Its very clear that the government need to take the power over planing decisions away from all councillors. they have proven they are not capable. Phil Hogan can talk about changing the law to facilitate collecting the household charge – let him talk about changing the law so that councillor corruption is ended and is meaningful to the people of this sad state.
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