Harold Wilson once famously railed against Swiss bankers – who he dubbed the ‘Gnomes of Zurich’ – when he felt that they were unfairly driving down the value of the Pound. How things have changed. Bankers other than the Swiss variety have recently been depositing their funds in Swiss Francs as a result of the uncertainty over the Euro and the US Dollar. The Swiss Franc has been seen as a ‘safe haven’ currency, which attracts large volumes of liquid funds when the financial environment seems excessively risky. The result of this has been to drive up the value of the Swiss Franc, causing the Swiss Central Bank to worry about the deflationary and recessionary consequences of a general deflation.
What to do? The traditional response would be to reduce interest rates, to make the Swiss Franc less attractive to overseas investors. The problem is that Swiss interest rates are, like those elsewhere, virtually at rock bottom. If the Swiss authorities could persuade others to raise their interest rates, then Swiss rates could fall in relative terms. The problem is that there is no great appetite for to help Switzerland in the international community. Other nations feel that they have who have too many problems of their own to co-operate with Switzerland.
That leaves managing the external rate of the Franc as the only option open to the Swiss authorities. The only tool that they have are open market interventions. If Switzerland had a regime of strict exchange controls, then managing the external rate would be much easier. It would also destroy the Swiss banking industry, which relies upon funds freely flowing into their coffers. Market intervention is a costly business. It is reported that the Swiss National Bank (SNB) has lost SwFr 10 bn already this year on defending the currency. Now that the markets sense a vulnerability – one that is possibly unsustainable – there is an incentive to bet against the Swiss Franc until the SNB runs out of money.
It is at this point that we shall see exactly how deep are the pockets of a gnome.
© The European Futures Observatory 2011