SZ News: ‘Hope’ of SNB Countering Franc Gains

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.”

Swiss National Bank confirms beggar thy neighbor policy


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AKA, “Beggar Thy Neighbor” policy straight from the book.

SNB’s Jordan says Franc Can’t be Allowed to Strengthen Further

by Dermot Doherty

Mar 22 (Bloomberg) — The Swiss franc can’t be allowed to appreciate further as “excessive” strength would put Switzerland’s export industry at a “disadvantage” and threaten the country with higher unemployment, Sonntag reported, citing Swiss National Bank board member Thomas Jordan.

The SNB’s decision this month to purchase corporate bonds is aimed at reducing the risk premium by narrowing the spreads on such debt instruments, Jordan said in an interview in today’s
newspaper.

“We are facing a severe recession” and need to be “unconventional” in dealing with it, Jordan said. The SNB will expand the money supply “as strongly as is needed” to prevent deflation, according to the newspaper.


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In case you thought the Swiss National Bank understands its monetary system


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Interesting the legendary Swiss National Bank doesn’t yet understand it’s own monetary system.

Seems their understanding has yet to move beyond the days of the gold standard.

SNB Moves Are Defense Against Deflation, Jordan Says

by Simone Meier

Mar 19 (Bloomberg) — Swiss central bank Governing Board member Thomas Jordan comments on the economic outlook, the SNB’s use of unconventional policy tools and deflation risks. He made the remarks in a speech in Zurich today.

On currency measures:

“From the SNB’s point of view, the current currency-market measures are serving as an insurance against the threat of an unwelcome strong appreciation of the franc. At the same time, they’re serving as defense against deflation.”

Yes, the ‘deflation’ from lower costs of falling export prices that drive down domestic wages, profitability, and asset prices.

“The SNB’s currency purchases don’t have anything to do with a ‘beggar thy neighbor’ policy and must not be interpreted as the beginning of a currency war. It’s not about Switzerland creating advantages with a weak franc.”

He can call it whatever he wants. Functionally it’s a policy to keep their currency weak enough to keep export prices from falling. ‘Beggar thy neighbor’ is not a matter of degree. It means leaning on your neighbors domestic demand for your own employment purposes.

This is what happens when those running a government don’t understand how their non convertible currency works.

“Our purchases on the currency market are only to be seen as an additional instrument in times of zero-rate policy to fight the deflation threat.”

Call it what you want, mate. It’s a dead on beggar thy neighbor policy by ‘previous’ definition.

On unconventional tools:

“The use of unconventional measures doesn’t go without risks. On one hand, effects and side effects aren’t as well known as those of the conventional monetary policy.

First, they are highly unsure of the effects of ‘conventional monetary policy’ as per their own econometric research and theory.

Second, the effects of ‘unconventional measures’ are not only not well known, they are not understood at all.

Ironically, however, they are easier to understand, they alter the term structure of rates and remove interest income from the non government sectors.

And selling your currency to buy FX is an inflationary bias that drives down your currency and increases local currency prices of imports and exports.

On the other hand, it’s an intentional over-supply of the economy with liquidity.

Whatever that means in this context. Close questioning of what this means operationally reveals it’s empty rhetoric, all based on the backwards notion that the banking system needs reserves to be able to make loans.

There needs to be an immediate exit of unconventional measures once the monetary stimulus can be reduced. The assessment of the current crisis means that the SNB has to take these risks.”

There are no such risks. They don’t know how their own monetary system works.

The SNB “has to already engage itself with the question of a timely exit of these measures, however. Even with all uncertainty in forecasts, there’s certainty that there will be quieter times in the future. The exit of unconventional measures has to immediately happen once the monetary stimulus can be reduced. That’s the case when tensions on money and credit markets are over and inflation risks are increasing along with an economic recovery.”

“The dosage of monetary policy isn’t easy in the current environment. The assessment of current risks is clearly in favor of rather too much monetary stimulus than too little.”

The SNB is “confident” it will be able “reduce liquidity” when the time comes.

This is all non-sensical.


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SNB Not Pursuing ‘Beggar-Thy-Neighbor’ Policy, Roth Tells FT


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Looks like he’s been reading my blog.

It is a beggar thy neighbor policy, by definition.

SNB Not Pursuing ‘Beggar-Thy-Neighbor’ Policy, Roth Tells FT

by Simone Meier

Mar 17 (Bloomberg) — Swiss central bank President Jean- Pierre Roth said the bank is ready to stem further gains in the Swiss currency if needed, the Financial Times reported.


“We have clearly shown what our commitment is and the market has reacted accordingly,” Roth said, according to the FT. “We have a clear strategy.”

Roth said Switzerland “would be foolish, as a small and open economy, to try to gain competitiveness through the currency.” He said that it’s “not a beggar-thy-neighbor policy. It’s just to protect the Swiss economy from deflation.”


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Re: SNB and personal income


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(email exchange)

We’ll see if the SNB can borrow all the USD it needs without the Fed on an ongoing basis.

External debt like this is the stuff of most government financial blowups.

Low crude prices and falling US import demand are keeping USD ‘hard to get’ for the rest of the world that somehow got caught short USD, probably by funding USD assets that have declined in price.

Separately, attached is a graph of personal income that of course doesn’t ‘prove’ anything about the macro effect interest rates being the opposite of what CBs think it is.

Fed cuts have reduced government payments of interest to the non government sectors that remain net savers.

Fed ‘quantitative easing’ has also removed interest income from the non government sectors.

To paraphrase from a source I can’t recall where it was better stated, any more victories like these and we’ll be ruined.

>   
>   On Mon, Feb 2, 2009 at 9:20 AM, Mauer wrote:
>   
>   What do you make of this?
>   
>   BN 13:02 *SNB SAYS BILLS TO FINANCE TO UBS TOXIC ASSET FUND
>   1) BN 13:02 *SNB SAYS BILLS TO FINANCE TO UBS TOXIC ASSET FUND
>   2) BN 13:02 *SNB BILLS TO HAVE MATURITY OF LESS THAN YEAR
>   3) BN 13:02 *SNB TO ISSUE BILLS TO FINANCE LOAN TO SNB STABFUND
>   4) BN 13:02 *SNB SAYS DOLLAR BILLS ARE NEW MONETARY POLICY
>   INSTRUMENT
>   5) BN 13:00 *SNB TO ISSUE DOLLAR-DENOMINATED SNB BILLS

Thanks!

Didn’t know that- much appreciated!

>   
>   On Mon, Feb 2, 2009 at 10:56 AM, J A wrote:
>   
>   Warren,
>   
>   You know that there is a classic paper by Ferguson and Epstein who provide
>   archival evidence that it was the banks that convinced the Fed to reverse its
>   quantitative easing and low interest rate policy because it was driving them
>   bankrupt. All their commercial loans had defaulted and the only income
>   learning assets they had were Treasury securities, so the lower rates went the
>   lower their income and in the end they were having trouble covering operating
>   costs, so they convinced the Fed to raise rates. Much like Greenspan giving the
>   banks the yield curve to ride to generate income after the 1989-90 real estate
>   bust.
>   


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Roubini blog

Roubini totally doesn’t get it.

The point of CB intervention is to keep interest rates at their target rates, not to provide funds for lending, as described in previous posts.

This plan will succeed at doing that, best I can tell.

It’s all about price, not quantity.

That’s all a CB can do.

Also, insolvency matters to the real economy only as it reduces aggregate demand.

The largest current risk to aggregate demand in my estimation is the media frightening businesses and consumers from spending.

That’s always a risk to a monetary economy where the government isn’t standing by to net spend when demand sags. When government does that there is little or no risk of negative growth or unemployment as we currently define it.

Nouriel Roubini | Dec 12, 2007

Given the worsening of the global liquidity and credit crunch – with a variety of short term interbank Libor spreads relative to policy rates and relative to government bonds of same maturity being even higher recently than at the peak of the crisis in August – it is no surprise that central banks were really desperate to do something.

The announcement today of coordinated liquidity injections by FED, ECB, BoE, BoC, SNB is however too little too late and it will fail to resolve the liquidity and credit crunch for the same reasons why hundreds of billions of dollars of liquidity injections by these central banks – and some easing of policy rates by Fed, BoC and BoE – has totally and miserably failed to resolve this crunch in the last five months. What was announced today are band-aid palliative that will not address the core causes of this most severe liquidity and credit crunch.

There has some heated debate in recent weeks on whether the liquidity crunch is due to:

  1. short-term year end liquidity needs (the “Turn”);
  1. a more persistent liquidity risk premium;
  1. a rise on counterparty risk and broader perceived credit problems of counterparties; i.e. serious problems of insolvency rather than illiquidity alone.
  1. a more general increase in risk aversion due to severe credit problems and information asymmetries (risk aversion due to uncertainty about the size of the financial losses and uncertainty on who is holding the toxic waste of RMBS, CDOs and other ABS products);
  1. the failure of the monetary transmission mechanism in a financial system where most financial institutions are now non-bank and thus do not have direct access to the central banks’ liquidity or lender of last resort support.

The severe financial crunch is likely due to all of the factors above; but the measures announced today can only partly deal with the first of the two explanations above of the crunch and will do nothing to address the other causes of the crunch. These measures will not be successful for a variety of reasons.

First, you cannot use monetary policy to resolve credit and insolvency problems in the economy; and most of the crunch is due not just to illiquidity but rather to serious credit and solvency problems of many economic agents (households, mortgage borrowers, subprime, near prime and prime mortgage lenders, homebuilders, highly leveraged and distressed financial institutions, weak corporate sector firms).

Second, monetary injections cannot resolve the information asymmetries and generalized uncertainty of a financial system where financial globalization and securitization have led to lack of transparency and greater opacity of financial markets; these asymmetric information problems that generate lack of trust and confidence and significant counterparty risk cannot be resolved with monetary policy.

Third, the US is at this point headed towards a recession regardless of what the Fed does as the build-up of real and financial problems (worst housing recession ever, oil at $90, a severe credit crunch, falling capex spending by the corporate sector, a saving-less and debt burdened consumer buffeted by ten separate negative shocks) in the economy make a recession unavoidable at this point; similarly other economies are also now headed towards a hard landing as the US real and financial mess lead to significant contagion and recoupling.

Thus, to mitigate the effects of an unavoidable US recession and global economic slump the Fed and other central banks should be cutting rates much more aggressively. The 25bps cut by the Fed yesterday is puny relative to what is needed; 25bps by BoE and BoC does not even start to deal with the increase in nominal and real borrowing rates that the sharp spike in Libor rates (the true cost of short term capital for the private sector) has induced.

And the ECB decision not to cut policy rates – and deluding itself that it may be able to raise them once the alleged “temporary” credit crunch is gone – is dangerous and ensures a sharp slowdown in a Eurozone where deflating housing bubbles, oil at $90 and a strong Euro are already sharply slowing down growth. Central banks should have announced today a coordinated 50bps reduction in their policy rates as a way to signal that they are serious about avoiding a global hard landing. Instead the Fed yesterday gave a paltry 25bps with a neutral bias rather than the necessary easing bias.

Fourth, the actions by the Fed today provide more liquidity to a greater variety of institutions but, as the Fed announced, these institutions are only “depository” institutions, i.e. only banks. The severe liquidity and credit problems affect today a financial market dominated by non-bank that do not have direct access to the liquidity support of the Fed; these include: broker dealers and investment banks that do not have a commercial bank arm; money market funds; hedge funds; mortgage lenders that do not take deposit; SIVs, conduits and other off-balance sheet special purpose vehicles; states and local governments funds (Florida, Orange County, etc.).

All these non-bank institutions do not have direct access to the Fed and other central banks liquidity support and they are now at risk of a liquidity run as their liabilities are short term while many of their assets are longer term and illiquid; so the risk of something equivalent to a bank run for non-bank financial institutions is now rising. And there is no chance that depository institutions will re-lend to these to these non-banks the funds borrowed by central banks as these banks have severe liquidity problems themselves and they do not trust their non-bank counterparties. So now monetary policy is totally impotent with dealing with the liquidity problems and the risks of runs on liquid liabilities of a large fraction of the financial system (in a world where these non-bank financial institutions play a larger role in financial markets than non-banks).

And let us be clear: the Federal Reserve Act striclty forbids the Fed from lending to non-depository institutions apart from very emergency situations that would require a complex and cumbersome approval process and the provision of high quality collateral. And the Fed has never – in its history – used this procedure and lent money to non-depository institutions.

Fifth, as discussed before on this blog, this is the first real crisis of financial globalization and securitization; it will take years of major policy, regulatory and supervisors reform to clean up this disaster and create a sounder global financial system; monetary policy cannot resolve years of reckless behavior by regulators and supervisors that were asleep at the wheel while the credit excesses of the last few years were taking place. Now the US hard landing and global sharp slowdown is unavoidable and monetary policy – if aggressive enough with much greater and rapid reduction in policy rates – may only be able to affect how long and protracted this hard landing will be.