Last Friday the ongoing “Currency War” claimed an unlikely casualty – Switzerland, a nation best known for being solid in money and neutral in war. The central bank had to remove the ties to the Euro under pressure from foreign investors and the result was an upward explosion of 39%, before settling in at 15%, in the Swiss Franc (CHF, known by its French name Confédération Helvétique).
That may sound like good news for the alpine nation, and it is if you are holding a lot of CHF in a bank account. But if you make precise equipment or other things that the Alpine nation is known for, your stuff just got 15% more expensive. Managing this situation is going to be a tough one for the Swiss, certainly, but it’s a disaster for those who borrowed money from their famously solid and discreet banks.
It’s also an earthquake that rattles our whole idea of “globalism”.
What happened is simply this. For years, Switzerland has pegged their currency to the Euro – a smart idea given that they are surrounded by the Eurozone. But as the EU limped along from one crisis to the next, and has now started printing more Euros as weapons in the Currency War, Switzerland remained as stable as the Matterhorn. Try as they could to keep their tie to Europe, it simply became too expensive.
When they let go it was like a stretched rubber band coming back, and it hurts.
The currency war, if you’ll recall, is a race by nations to trash their own currencies in an effort to make their products appear cheaper, thus grabbing a bigger share of the global workforce. The goal is a cheap, worthless currency – not a valuable one. The CHF and Swiss banks are quaintly reliable in this fast and loose time.
That has been good for attracting gamblers who have been looking for risk-free investments, a rare thing in a volatile world. But it’s played havoc on the value of CHF and ruined the Swiss’ own ability to invest.
That’s the real problem with this upward explosion. Many people in nations with unreliable banks that are forced to require high interest rates have been borrowing in CHF because it seemed like a sensible thing to do. In Russia, for example, interest rates for small business loans, when you can get them, are now above 30%. But if you borrowed in CHF your loan payment due in CHF is now 15% higher than it was a week ago.
Russians, in particular, have been hit hard. First the Ruble lost half of its value in the last six months, then this. There are reports of people whose mortgage payments to Swiss banks have tripled. It sure seemed like a good idea when they were taken out, too.
Why did the Swiss Central Bank do this? Couldn’t they just print more CHF and be done with it? They could have, but it would have resulted in inflation and other problems at home eventually. They tried this for a while, buying foreign currency like Euros as fast as they could. It wasn’t enough. All solutions required them to remove their tie to the Euro and wait for it to settle down.
The net effect for them is a -0.75% interest rate that may yet have to go to -2.00% in an effort to cheapen CHF back down where it needs to be. Think about it. You have to pay 2% a year for the privilege of having your money in a Swiss Bank. This will happen to counter the rise of the CHF, but it will take time. Meanwhile, you can expect some kind of controlled inflation that the central bank will attempt to carefully manage as the CHF goes back down.
In other words, Switzerland has reluctantly joined the currency war.
In global terms, this is absolutely devastating. There is simply no truly “safe haven” anywhere in the world and no central bank that can claim to control its own currency. The US Dollar, for example, has been quietly tracking upward. That’s a lot of the reason that oil seems cheaper to us – where it is 50% less than a year ago in US Dollar terms, it’s only down 20% in Euro terms. It’s as much that the buck has gained as oil has dropped.
That is why manufacturers have a real problem on their hands. It may be tempting for a US manufacturer to source parts from a nation where they appear cheaper, but in a time of currency volatility it becomes much harder to guarantee the price and availability due to currency translation. Local sourcing might seem more expensive now, but defying global supply chains has some insurance that comes along with the higher price tag.
In the meantime, investors and borrowers across the sketchier parts of Europe are trying to figure out what comes next now that everything seems to have changed in one day. What will happen to CHF over the long haul? What will happen to anything?
That’s why the real casualty in the currency war isn’t Switzerland, it’s globalism. And that must strike fear in every institution and system that has been better on an ever smaller world for the last several decades.