Swiss central bank discord could presage worrying trend
In normal times, investors spend little time contemplating the political status of the Swiss National Bank. Now, however, they should – particularly given that geopolitical turmoil is causing the Swiss franc to soar.
For while the markets worry about Libyan politics, US unemployment, British inflation or oil prices, a curious saga is playing out in Zurich that creates food for thought.
The issue at stake revolves around some SFr21bn of losses recorded last year at the SNB. During most of its history, the SNB has prided itself on being very risk averse, so much so that it holds a large part of its assets in gold and is one of the few western central banks that regularly publishes the market value of its assets. It does this to demonstrate transparency and integrity, particularly to its owners, which include local cantons.
However, early last year, the SNB embarked on an uncharacteristically bold adventure: when the swiss franc soared in value, amid the eurozone crisis, the SNB intervened heavily to weaken it. Initially, the move seemed quite popular in Switzerland, particularly among exporters. But the SNB failed to turn the currency trend.
So in June the intervention was abandoned, and by the end of 2010 the franc was 6 per cent stronger than in late 2009. Meanwhile, the SNB was left with SFr21bn losses, on a mark-to-market basis, which would have been even far larger, were it not for the mark-to-market profits that the SNB enjoyed on its holdings of gold.
So far, so theoretical – or so many economists might argue. After all, the balance sheets of central banks are always somewhat theoretical, the SNB has a spare capital cushion to (just) offset this blow – and, in any case, that SFr21bn paper loss may yet disappear, if currencies swing again. Indeed, since the SNB reported its numbers in late 2010, global markets have been so volatile that its “p&l” has already moved quite wildly (something which is not entirely obvious since the SNB only reports every quarter.)
But these paper losses have already sparked a flood of all-too-tangible criticism of the SNB from Swiss bankers and politicians; indeed, there have recently been demands that Philipp Hildebrand, SNB governor, should resign. One reason for this anger is that the SNB has used the “profit” it booked on its gold holdings to distribute SFr2.5bn each year to the local cantons and Federal government – and those cantons fear they will now lose that income because of the 2010 losses.
But another crucial issue is that many local bankers are furious with the tough regulatory stance that Hildebrand (quite rightly) took towards them during the financial crisis. As a result, they are trying to use the debacle as a weapon to force Hildebrand out.
This is where the story gets potentially interesting – and cautionary – for the non-Swiss world. The losses at the SNB have come to light partly because it is relatively transparent – and currency swings can be monitored more easily than, say, price moves on bonds. But the SNB is not the only central bank that has recently taken bold gambits. The European Central Bank, for example, holds an (ever-swelling) pile of periphery eurozone bonds; the Fed’s balance sheet has more than doubled in size, to $2,500bn, as it has gobbled up mortgage-backed bonds and Treasuries; and the Bank of England also holds a large pile of gilts and mortgage assets.
Thus far – unlike at the SNB – those experiments have not generated visible losses. A cynic might argue that is because there is less transparency. However, in reality, other central banks have also been canny – or lucky – too. The Fed, for example, acquired its mortgage assets at a very low price, which creates a cushion. Last year the Bank of England saw unexpected gains on its gilt holdings and the ECB has recently enjoyed rising quantities of interest income from its peripheral bonds.
But this happy picture may not last indefinitely. In the coming years, the price of Treasuries or gilts could plunge; some peripheral eurozone bonds could even default, creating losses. If that ever occurred, some central bankers think that any pain could still be offset. The Fed, for example, currently receives so much “income” from seigniorage that it may have considerable room for manoeuvre. But, there again, the Fed already faces virulent domestic political criticism; and at the ECB there is no clear agreement about who would indemnify it in event of losses. It is not impossible to imagine a scenario, then, where losses might stir up a row; particularly if political groups already had an axe to grind – as in Switzerland.
In a world where central bankers and politicians are now moving into uncharted waters, that row in Zurich may yet turn into the leading edge of a trend. Western central bankers had better hope that Hildebrand survives; even as SNB officials cross their fingers that Mideast tensions – or Irish woes – do not push the franc too much higher.
gillian.tett@ft.com
.Copyright The Financial |
