High Costs Here Too

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Includes: EWL, FSZ, FXF, HEWL, SWZ
by: Alhambra Investment Partners

By Jeffrey P. Snider

On January 15, the Swiss National Bank suddenly and without warning removed the franc's peg to the euro. Months later, there is still much confusion as to why they acted, including some of the usual doctrinaire assessments that take no account of wholesale "dollar" reality. In other words, the SNB was explicit on January 15, though nobody apparently listened. The problem was not the euro or the franc, but what the euro was doing of the franc to the "dollar."

From that drastic action we can appreciate just how bad the "dollar" problem must have been at that choke point because of the costs the SNB was apparently willing to bear to relieve the "dollar" pressure. It hasn't been fully withdrawn, either, which makes that uncertainty all the more compelling as a means of comparison. For them to try to relieve that pressure without any assurance they could, knowing full well that it would be costly to even try, shows that the "dollar" situation must have been truly dire at that moment.

We are starting to gain some quantitative insight, even if tangential, as to those deductions involved in the rectification attempt. SNB issued its performance update last night, reporting massive losses that impair its local canton dividends but also threaten further instability and its credibility.

The negative result on foreign currency positions amounted to CHF 47.2 billion in total.

On 15 January 2015, the SNB decided to discontinue the minimum exchange rate of CHF 1.20 per euro with immediate effect. The subsequent appreciation of the Swiss franc led to exchange rate-related losses on all investment currencies. For the first half of 2015, these amounted to a total of CHF 52.2 billion.

For a country the size of Switzerland, those are massive losses - though not as much in the respect of the size of the Swiss banking system which was the entire point. It was obviously judged far better to take, to this point, CHF 52 billion in "losses" than to "allow" currency imbalance (not currency but the measure of wholesale liability exchange globally) to further threaten greater banking disruption.

The SNB, as far back as 2011, has been explicit in its insistence that losses matter nothing to a central bank because, as always, the myth of the printing press. But this episode alone shows that wholesale operation is a great alteration on those assumptions - the SNB is taking risk that will potentially destroy its "capital" base, forcing it to "create" francs that aren't really francs in the wholesale sense. Thus, one printing press to "save" another (bank balance sheets).

The Swiss economy has also suffered, again an accepted cost inferred at the outset of the removal:

The continued strength of the Swiss franc is hurting exports from the country which are down 2.6% this year. The tourism industry has also reported fewer visitors and retailers are also struggling.

The first-half loss was almost entirely - 47.2bn francs - the result of losses on foreign exchange positions, which occurred in the weeks that immediately follow the bank's decision to remove the currency peg against the euro.

As Brazil, the Swiss are showing to great explicitness the high and very real costs of the eurodollar system's decay. Though it may seem limited to foreign shores, it is self-reinforcing throughout and will not be contained. Even the vaunted Swiss central bank, perhaps the most responsible of the domain (faint praise, the best of a bad function isn't saying all that much), was overridden by growing and perhaps unstoppable eurodollar instability.