The Swiss have been buying euro all along to support their exporters (at the expense of the macro economy but that’s another story).

No doubt other nations are/will do same, also to protect exporters, and do the best they can managing risk of their euro denominated financial asset portfolios.

Over the last two years or so the ‘automatic stabilizers’ in the euro zone added to deficits and weakened the currency, helping to support domestic demand and exports, but threatening solvency as the national govts are credit constrained.

The credit constraint aspect blocked further fiscal easing, and caused a proactive move toward fiscal tightening.

If the easing phase was sufficient to cause them to ‘turn the corner’ with regards to GDP, which appears to be the case, it is possible GDP growth can remain near 0 with the austerity measures, while the firming currency works to slowly cut into exports.

In other words, the euro zone may, in its own way, also be going the way of Japan, but with the extreme downside risk that the austerity measure cut too deep and the deflationary forces get out of hand, as they are flying without a fiscal safety net.

Switzerland’s Gerber Sees ‘Hope’ of SNB Countering Franc Gains

By Simone Meier

June 4 (Bloomberg) — Jean-Daniel Gerber, the Swiss
government’s head of economic affairs, said he’s counting on the
central bank to counter any “excessive” gains of the franc to
protect the country’s export-led recovery.

“I’m of course concerned” about franc gains, Gerber, who
heads the State Secretariat for Economic Affairs, told Cash in
an interview published on the newspaper’s website today. “But
there’s hope that the SNB will be able to keep its promise of
countering an excessive appreciation of the franc.”

The Swiss currency has been pushed higher on concerns that
a Greek debt crisis will spread across the 16-member euro region
and hurt an economic recovery. The Swiss National Bank has
countered franc gains by purchasing billions of euros at an
unprecedented pace to protect exports and fight deflation risks.

The franc today breached 1.40 per euro for the first time
since the single currency was introduced in 1999. It
strengthened to as much as 1.3867 against the euro, trading at
1.3942 at 3:29 p.m. in Zurich.

Gerber said that while it’s “up to the central bank” to
decide on the extent of currency purchases, the SNB’s ability to
counter franc gains is “theoretically unlimited.”

“You can always counter an appreciation if you want to,
you just have to inject money into the market, purchase euros,
and that’s how you’re able to stabilize the value of the franc
versus the euro more or less,” he said. “But of course it
could have considerable negative side effects, namely of larger
liquidity sparking inflation if it isn’t re-absorbed.”

9 Responses

  1. One of the weaknesses of floating rates? Everyone’s strategy seems to be exporting out the mess, and that’s impossible. All that will result is a currency war and mercantilist/protectionists policies, which in the past has led to hot wars.

    1. Can someone explain ‘the other story’ to me? In what way does buying foreign currency necessarily come at the expense of the macroeconomy?

      Thanks for clarifying,


      1. Oliver, I think that point is that government are fixed on imposing austerity domestically and exporting their way out of this. Everyone can’t do that. It may work for some for a while, but the one’s for whom it is not working — surpluses in one area have to be offset by deficits elsewhere — are going to upset. This will lead to trade wars, protectionist measures, and in the end political instability. It’s already happening between the US and China, and China hands Michael Pettis and Andy Xie have been warning about it recently. This could get ugly fast.

      2. Thinking of Switzerland lowering the value of its currency through:

        1- Swiss central bank buys euros (i.e. sells Swiss Francs)
        2- Value of Swiss franc depreciates vis a vis the euro
        3- Swiss francs(SF)in foreign exchange markets return to Swiss banking system.
        4 Swiss central bank sells SF securities to reduce SF excess reserves in the banking system (see note at end)
        5-Net effect of forcing down the value of the currency is that the Swiss central bank holds a large quantity of euros and has issued an equal value of SF securities which are now outstanding and appear as Swiss central bank debt. Warren has called this running an off-balance sheet deficit, I think.
        6-The euros held by the Swiss central bank cannot be sold for any other currency since that would push down the value of the euro, negating the purpose of the exercise.
        7-The lower value of the SF means imports cost more and constitutes a tax on consumers and businesses that require foreign purchased inputs. The effect of the higher import prices is to lower domestic economic activity.
        8-The lower value of the SF results in an increase in Swiss exports, increasing economic activity
        9-Increased exports push up the value of SF which must be offset by making further purchases of euros
        10-etc. Huge quantities of unusable euros could be accumulated this way, accompanied by an equally huge issuance of SF government securities.

        Clearly this process forces consumers, importers, and businesses requiring foreign inputs to bear the cost of increased exports.

        What I don’t understand is why the Swiss government would not simply increase domestic spending substantially. That would increase domestic economic activity and imports along with it. The increase in imports would cause a reduction in the value of the SF and promote exports. The Swiss people would be better off due to the increase in economic activity. The deficit spending required would result in the issue of a potentially large quantity of SF securities to reduce excess reserves in the Swiss banking system as before when the central bank sold SF. But that is what occurs anyway when the Swiss central bank sells SF in foreign currency markets.

        (Not sure what kind of monetary arrangements the Swiss use. Could mean bank debts to the central bank are reduced if it is an overdraft system))

      3. Oliver: “In what way does buying foreign currency necessarily come at the expense of the macroeconomy?”

        Compare buying Euros that you then hoard with spending the same Francs to buy something useful from your own citizens.

      4. At the government level, the major transactions to influence rates are by the CB’s, and this done as a CB operation, not a Treasury op. For example, to support the dollar by disallowing the euro to slide, giving Europe a trade advantage, the Fed simply issues reserves as its liability and buys euros, which it adds to its assets. Government “spending” is not involved, and the deficit is not affected. Similarly, China buys dollars in increase yuan in order to keep its currency within the bounds it sets instead of letting it rise, which would adversely impact their exports to the US.

        At the nongovernment level, capital flows relative to risk/return. Capital flight occurs when a currency is perceived to be getting “in trouble.”

  2. Oliver

    Exports are real costs and imports real benefits.

    the combo is called the real terms of trade.

    economics is the opposite of religion- it’s better to receive than to give

    does that help?

    1. Thanks, everybody. I was trying to understand why buying Euros automatically meant that the Swiss government could not also spend domestically. I can see the terms of trade changing with accumulation of Euros (that’s the idea, I guess) although I have to add that the aim is to keep the exchange rate the way it was before the Euro tanked, so in effect it would not feel like a ‘tax’ on imports. In fact, an appreciation would feel more like a tax on exports, which, as someone else noticed, seems to be the cure for everything nowadays.

      But yes, the Swiss economy, although better than in neighbouring countries, could use a serious push in AD. It’s been anaemic since, what 1985? All of its 0.5% growth rate is achieved through foreign direct investments (thanks to the high SF, I guess :-))… I just thought it might be possible to do both. But if I understand correctly what they’re up to gives us a: a danger of inflation down the road, b: higher profits for exporters that are worth less on the fx markets and c. nothing much for the Swiss people. Is that about right? Or can the maturing bonds be seen as some kind of lagged stimulus in disguise? Save exporters first, silence the inflationistas and stimulate silently? Some real Swiss weaseling in that case.

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