There were a few stories today about the SWISS complaining about the negative impact the FRANC‘s record strength is having on the economy. Both Bloomberg and the Financial Times ran articles citing Swiss policy makers and SNB officials raising the issue of currency strength and the possible need for intervention to halt the FRANC‘s rise. In an article by Haig Simonian in the FT, he details the high cost of SNB intervention on the CANTONS. Under Swiss law, the central bank disperses a share of its annual gains to the different CANTONS to help them meet their budgets. This year, SNB has a sizable loss of 21 billion FRANCS through November from foreign exchange and an overall loss of 8.5 billion FRANCS because of windfall gains from GOLD and other trading.
Swiss politicians are nervous that the failure to halt the SFR‘s appreciation will negatively impact trade going forward and have scheduled a January 14 meeting with concerned constituencies to discuss the problem. NOTES has discussed this issue recently, and, in our opinion, the SWISS policy makers should go back to the policy invoked in the late 70s/early 80s: Place a negative rate on foreign deposits in SWISS banks. A punitive negative 5 percent would do a great deal to stem the inflow of funds and there can be different variations on this theme. Daniel Lampert, a SWISS labor economist, opined that the SNB should take a page from South America’s book, “The SNB can learn a lot from Brazil.”
Lambert is not correct for the Brazilians have tried to stem the rise of the REAL by placing a tax on short-term investments and just last week added a new twist by ramping up the haircut costs on SHORT DOLLAR positions. Still, the REAL hovers at recent lows and with this being the case, Brazilian Finance Minister Guido Mantega warned during the weekend that the present currency war could turn into a trade war. The Brazilian rhetoric has been heating up as President Rousseff seems to be more determined than LULA to stem the REAL‘s rise because of its negative impact on Brazilian manufacturing. Again, enough with the noise. If the Brazilians want to stem the rise of its currency, then cut rates for the real yield on Brazilian debt is some of the highest in the world.
In a world plagued by low real yields because of credit problems in the developed world, the Brazilians have some wiggle room in the short-term and should not be overly concerned about the inflationary impact. The market is placing a high probability of Brazilian rates heading higher this year so Mr. Mantega can surprise the markets by lowering rates and seeing what the market does with the REAL. Threats of a trade war are not going to provide the solution as trade will diminish and Brazil’s growth story will come to a halt resulting in lower rates anyway. Interesting that Mr. Mantega not only places blame on the U.S. and FED policy but also points the finger at the Chinese. The BRICS seem to have their own issues as its uniformity is beginning to fray. Gee, can’t wait for the next G-20 meeting with President Sarkozy at the helm.
As the European crisis moves from periphery to periphery, the major economies try to stay ahead of default. The Portuguese are coming to market with new DEBT this week and just as with the Irish, French and German authorities are pushing Portugal to take a package from the IMF and the EFSF. If the market were to force Portugal to pay higher rates, the impact would possibly lead Portugal to default and place Spain in a very precarious position. It is time for the ECB and European Commission to stop the brinkmanship and develop a sound program that ensures creditors of the EURO‘s ultimate viability or force the weakest PIIGS out until they get their houses in order. Again and again, the EU stares into the abyss and comes away blinking. The game is getting old and if the FED was not on a QE binge the market would force the euro down.
There was also a story out of Europe that Hungary’s financial regulator was suggesting that banks should help consumers switch from loans made in SWISS FRANCS to loans made in EUROS. Many Eastern European borrowers sought loans in SFR because borrowing costs were so low, but the rapid appreciation of the SWISSIE showed the folly of that idea as it is a classic case of centime wise and FRANC foolish.
These loans have been a burden as the high cost of paying back an appreciating currency has proved an economic drag. According to a Bloomberg story, foreign currency loans amounted to 72 percent of Hungary’s household credit, 91 percent was in currencies other than the EURO, mainly the SWISS FRANC. Another potential problem for Swiss Banks is that the loans become burdensome to consumers, which is just another example of there being no free lunch at the economic counter. This is a fine example of the inverse effects of a currency carry trade gone bad.