What Has Happened to Swiss Franc?
Belgrade, 19 January 2015
What Has Happened to Swiss Franc?
In his regular report on plans for the coming period, just one month earlier, on 10 December, the Governor of the
Swiss National Bank (SNB) stated that “SNB will continue to enforce the minimum exchange rate with the utmost
determination”.
However, only four days ago, on 15 January, the SNB virtually overnight, without any prior announcement, without
even a “hint”, decided to abandon its love to EUR, in the parity of CHF 1.2 for EUR 1.
The consequences of the black Thursday on FX markets may be compared to the tsunami which hit the Asian
shore in December 2004. There are many victims. From brokerage companies, FX dealers, funds, up to, much
closer to us, our neighbours and fellow citizens indebted in Swiss francs.
If we want to understand what happened, first, we have to get back to 2011. The Eurozone crisis was in its full
swing. The Germans want to help, the Germans do not want to help. The whole Europe is in feverish mood.
Greece was about to go bankrupt. Portugal, Spain, and Italy are just behind it. It seemed as if the Eurozone would
have fallen apart anytime then.
What did big investors, having seen that the currency was losing its value day by day, do? They considered how
to protect themselves by buying dollars, gold, as well as Swiss francs. In addition to the huge demand, the price
also surged.
In the summer of 2011, franc was worth more than today. To protect its currency from being overestimated, and,
in addition, Swiss export industry, tourism, etc., the SNB decided to peg its franc to euro at the level of CHF 1 for
EUR 1.2, and to redeem the excess which would have occurred on the market. Using the similar mechanism, but
in reverse order, the National Bank of Serbia redeems excess RSD on the market, because, we as a country,
spend more abroad than we generate income. As a comparison, in 2014, the NBS “spent” EUR 1.4 billion on
dinar defence.
In the period from 2011 to 2014, Switzerland “spent” EUR 450 billion to defend its franc.
The question is raised why has the SNB made such decision right now:
Dollar has begun to grow vertiginously in relation to EUR, meaning that 450 billion redeemed by the Swiss in the
past few years has been losing its value in relation to the world currency number 1 – dollar, even by several per
cents on a daily basis.
At the same time, rouble has begun to fall vertiginously, and rich Russians got an idea to buy Swiss francs, thus
creating an additional pressure.
On the top of this, the European Central Bank got the green light to, already next week, begin “printing” fresh EUR
500 billion, which additionally impaired EUR in relation to the major world currencies, above all, dollar.
Now, when we have understood why it has happened, let’s consider the repercussions to the region of Central
and Eastern Europe.
Housing, but also other loans in the countries like Poland, Austria, Hungary, and Croatia, will become more
expensive in relation to their referential value.
Poland and Austria are stable growing economies, therefore, the shock will be felt the least in those countries.
Their citizens mostly have stable jobs, their salaries (slightly) grow (on average), there will be more work-out
loans, but, on aggregate, there will be no major shocks.
Hungary has solved the majority of its problem. A populist measure, retroactive exchange rate return to 2008
period has enabled the Hungarians to be discharged with almost 30 per cent discount. However, at the same
Kontakti za detaljnije informacije:
Sektor komunikacija ErsteBanka.d. Novi Sad, Milutina Milankovića 11b, 11070 Novi Beograd, tel: 011/201-5012, fax: 011/201-5075
Vladimir Todorović, mob: 060/874-74-99, e-mail: [email protected]
What Has Happened to Swiss Franc?
Belgrade, 19 January 2015
time, such measure has decimated Hungarian banks, gross national income has vertiginously fallen, and
unemployment has reached its historical maximum value.
Croatia will be under a great pressure. The Croatian Government sees the possibility to make a populist move
within pre-electoral campaign as a very catchy one, especially after the loss of the presidential elections. The
opposition to such move would include the Croatian National Bank and Croatian Governor who understands very
well to what extent such populist measure would be additionally ruinous to already fragile Croatian
macroeconomic situation.
Repercussions to Serbia:
Around EUR 1 billion of, above all, housing loans and around 100,000 affected people. A great majority of
borrowers in Swiss francs have had difficulties in the payment of their monthly liabilities. After franc strengthening,
the majority de facto, and in accordance with the NBS regulations, become insolvent. Their loans have
additionally grown in relation to euro, their salaries have mostly remained the same or decreased, and the value
of purchased real estate has, in most cases, fallen.
What are the options:
A) return real estate to bank
Pro – at first, it seems as if agony ceases
Contra – a real estate invested in for years is lost. Probably, bank will not be able to collect the whole amount
from debtor, thus, it will probably collect remaining debt using the instrument of personal bill of exchange,
including guarantor, if any.
B) continue repayment
Pro – no loss
Contra – it becomes impossible in great majority of cases, because there are no sources for instalment
repayment and for other necessary costs of living
C) convert loan into EUR
Pro – instalment decreases, risk of high sudden surges decreases
Contra – one-off loss resulting from new franc value must be assumed
Where could the government provide support?
The spread of possible measures is rather big. From “making” banks retroactively apply an old exchange rate
from 2007 or 2008, to assuming a (budget) part of conversion burden.
However, whichever measure it takes, the government must be extremely cautious for several reasons. If the
government, through the budget or the NBS, is too strict like, e.g., in case of the Hungarian scenario, there is a
reasonable fear that some foreign banks will make decision to withdraw from the Serbian market, and some may
be brought at the edge of insolvency. It may be a high cost both to the NBS and the budget in short and long term.
Also, a bankruptcy of a bank having high exposure in Swiss francs may be very expensive for the budget.
Not to mention here the issue of moral hazard – why not repaying loans in euros, and why only housing ones, but
not those for cars. Also, those with (very expensive) borrowings in dinars may rightfully ask “Why not returning a
portion of interest to me?”, etc.
My proposal:
Convert CHF loan (indexed in Swiss francs) into euros.
Support by bank may include that conversion price is transferred at the end of repayment period and to decrease
instalment by such amount (to remain the same as e.g. the one in December), or that banks additionally decrease
interest rate to such new loans which will now be in euros.
What may the government do:
Help commercial banks by ensuring as favourable conversion of CHF into EUR as possible.
If possible, provide support to banks by subsidising interest rate.
Kontakti za detaljnije informacije:
Sektor komunikacija ErsteBanka.d. Novi Sad, Milutina Milankovića 11b, 11070 Novi Beograd, tel: 011/201-5012, fax: 011/201-5075
Vladimir Todorović, mob: 060/874-74-99, e-mail: [email protected]
What Has Happened to Swiss Franc?
Belgrade, 19 January 2015
Slavko Carić, Erste Bank Executive Committee President
Kontakti za detaljnije informacije:
Sektor komunikacija ErsteBanka.d. Novi Sad, Milutina Milankovića 11b, 11070 Novi Beograd, tel: 011/201-5012, fax: 011/201-5075
Vladimir Todorović, mob: 060/874-74-99, e-mail: [email protected]