ON FRIDAY, the Swiss National Bank (SNB), Switzerland’s central bank, reported second quarter losses of 20 billion Swiss francs ($20 billion). Following an equally bad first three months of the year, the SNB’s losses so far for 2015 now amount to a whopping 50.1 billion Swiss francs, equivalent to 7.5% of Switzerland's GDP (see chart).
The SNB's losses were large but not unexpected. For years, the Bank has intervened in foreign exchange markets to prevent the Swiss franc from appreciating above its euro exchange rate cap, set at 1.20 francs per euro in September 2011. In January, the SNB abruptly abandoned its currency peg as the European Central Bank geared up for its €1.1 trillion quantitative easing programme. That caused the franc to immediately jump in value by more than 20% against the euro.
Scrapping the currency peg has had two nasty consequences. First, the appreciation of the franc made Swiss exports more expensive for foreigners, prompting the Swiss economy to start shrinking in the first quarter of 2015. Second, the depreciation of the euro against the franc led to significant currency losses on the SNB’s $550 billion foreign-exchange reserves, of which some $230 billion is held in the single currency. This alone accounted for 94% of the central bank's losses in the first half of the year.
The SNB must now strike a delicate...Continue reading
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