Cyprus was a money laundering facility for Russian oligarchs and crime syndicates and the EU had zero incentive to bail them out.
As this article states, "Wealthy Russians with money in Cyprus’s sickly banks lost billions." Since bank depositors who lost money were given bank shares, this article explores the idea that in theory this gave control of a Cyprus bank to Russians - but that's never going happen in actuality. -- nytimes.com
New subject. Imagine yourself in the role of the Swiss central bank.
1.) In order to continue exporting to Europe your currency has to stop appreciating. So you can create a lot of Swiss Francs and use it to buy Euros every day.
2.) The only other solution to an appreciating currency is deflation, where wages and real estate prices decline in Switzerland, which keeps your exports priced right as your currency appreciates in value.
A.) The problem is, Solution #2 is going to wipe out all of the Swiss banks who have made mortgages on Swiss real estate, as the price of the real estate becomes worth fewer Francs, and Swiss workers get pay cuts and can't make their mortgage payments.
B.) Solution 2 was not such a big problem when Europe had inflation because rising prices in Europe were offset by stable prices in Switzerland coupled with the rising currency. But with flat prices in Europe, or worse deflation, Switzerland had to employ Solution 1.
C.) Having employed Solution #1 you have to decide if there is any limit on how many Euros you intend to buy. Initially it doesn't take much - buying a few billion Euros scares people into not screwing with you. But events changed. The Euro has declined from $1.36 to $1.16 and is almost certainly headed lower as the ECB employs quantitative easing.
D.) Most likely at this point some hedge funds decided this would be a good opportunity to use Euros to start buying Swiss Francs. If the Franc falls with the Euro, the hedge funds are out nothing. But if they can buy enough billions of Francs to scare the Swiss central bank, they'll let the Franc rise and the hedge funds have a huge profit.
E.) So, you being the Swiss central bank, what do you do?
If you have the nerve you can create enough Francs to buy hundreds of billions of Euros, because you can create an endless supply of Francs - and that's what they should have done. The Franc's mind-space as the "gold currency" would have been terminated and Switzerland would live happily ever after.
Or you can let the hedge funds win for the moment, but you've lost some credibility in the process and your domestic economy is going to weaken significantly. And then what? That's why Paul Krugman points out they made the wrong choice. But you have to wonder what their own fear factor was in hitching their currency value to the Euro with the ECB beginning to do things they perhaps weren't comfortable with or;
. . . dropping the value of the Franc in tandem with the Euro by that much may have wiped out Swiss banks through any number of different mechanisms like of receiving less value back for Francs previously lent to customers around the world including Nestle and Swiss investment banking arms.
Maybe events happened so quickly they didn't have certainty to think through that their banks would come out fine if the Franc declined along with the Euro and the time to convince Swiss banks of this. They had conflicting goals and probably made a rushed decision under pressure which will likely cause more problems later than had they decided to tough it out. |
