FT.com / Currencies - Swiss central bank faces €7.5bn loss

Defending the franc doesn't come cheap...


Swiss central bank faces €7.5bn loss
By Haig Simonian in Zurich

Published: July 8 2010 21:11 | Last updated: July 8 2010 21:11


The Swiss National Bank may have suffered paper losses of up to SFr10bn (€7.5bn) from huge interventions in the currency markets to restrain the value of the franc.

The central bank is expected by market observers to report a big loss when it publishes second-quarter accounts in mid-August. Economists cannot make a precise forecast, as the SNB does not reveal when, or at what rates, it has sold francs and bought other currencies – mainly euros – in recent months. However, Martin Neff, chief economist of Credit Suisse, said: “It’s certain there will be a big loss.”

Felix Brill at Wellershoff & Partners, an economics consultancy, said: “There must be very substantial losses.”

An indirect acknowledgement of the potential pain came last month, when the SNB did a U-turn and said it was suspending interventions.

The bank attributed the move to declining concerns about the deflationary risks of a rising franc to the domestic economy. However, outsiders saw the step as an acknowledgement that intervention had failed.

The SNB’s foreign exchange reserves have more than quadrupled to SFr230bn since the financial crisis, with the total increasing by SFr135bn since December 2009. During that period, the franc climbed from SFr1.50 against the euro to about SFr1.33, and, recently, has briefly surged higher.

The appreciation has stemmed from fears about eurozone recovery prospects and the risk of a sovereign debt default, compared with Switzerland’s traditional haven status.

The franc has also gained from the relative strength of the Swiss economy. Growth is rising, while domestic consumption has remained robust. Last month, the SNB raised its 2010 growth forecast from 1.5 per cent to 2 per cent.

The prospect of a big loss has caused little concern in Switzerland, a situation all the more striking given the SNB’s unusual status among central banks of being a quoted company.

While 61 per cent of its shares are owned by Switzerland’s cantonal banks, the remainder are in private hands and the SNB has no explicit guarantee from the Swiss Confederation.

Economists attribute the relative calm to shareholders’ understanding for the SNB’s long-term thinking: a rising euro could even lead to profits on the reserves one day.

“A central bank doesn’t have to worry about showing nice profits every quarter or about a downgrade from a rating agency. So there’s no drama,” said Mr Neff.

Other economists added that past losses on currency intervention had sometimes been compensated by windfalls on gold, given that the price of gold has tended to rise during crises.

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FT.com / Currencies - Swiss central bank faces €7.5bn loss