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Thursday, March 28, 2024

Official Estimates Confirm Zero Hedge Projections That SNB Will Suffer €8 Billion In FX Interventions in Q2

Courtesy of Tyler Durden

A few weeks ago it was speculated on Zero Hedge that the total losses experienced by the SNB as a result of ongoing currency interventions in Q2, were in the €8 billion ball park arena. Today, the FT picks up on this theme and reports that “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.” And while that may not seem like a large number at first glance, as Bruce Krasting pointed out, “The 8.4b loss for the SNB would be equivalent to a $200 billion loss for the Fed. So actually this is a very big deal.”

Some more on this from the FT:

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.

And, just like us, the FT is troubled by the complete lack of concern by the market in light of these adverse developments:

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.

While we are confident that at the end of the day the price of gold will surely surge to cover a part of the paper losses, another issue, which we covered yesterday, is that as a result of over $500 billion in CHF denominated loans to Central and Eastern European countries (equivalent to the nominal GDP of the entire country) once loans start being unwound due to the massive strengthening in the swiss franc, leading to a vicious short covering cycle in the CHF, the adverse impact on the Swiss economy will be substantial. And yes, the central bank will have quite a bit to worry about then when coupled with the massive FX losses, the SNB has to turn on the same printing machinery made so popular in the US and the EU. A detailed recent discussion of this critical issue, which has been successfully swept under the rug for the time being, but which will soon be the topic de jour once attention shifts to Europe’s strongest economy, can be found here.

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