The Swiss National Bank (SNB) came in for a good deal of criticism inside and outside Switzerland when it announced without warning that it was ending its foreign currency purchasing programme to stabilise the euro exchange rate with the Swiss franc, writes Prince Michael of Liechtenstein.
The impact of the announcement was that the euro fell against the Swiss franc immediately by an unheard of 30 per cent. It stabilised at some 17 per cent less at parity of 1:1.
The communication policy of the SNB was highly criticised. Christine Lagarde, managing director of the International Monetary Fund made her unhappiness public at not being tipped off in advance. It is doubtful that the European Central Bank was informed either.
It is very understandable, if it is not mandatory, to keep such decisions confidential. This means the moves can be implemented without interference or leaks. It also avoids any chance of speculation or insider transactions.
The SNB is independent in its decisions so Swiss politicians were not informed of the decision by the SNB on January 15, 2015.
It has become something of a habit to influence markets by hints and nudges from Central Banks since the time of Allan Greenspan, former chairman of the US Federal Reserve from 1987 to 2006. But effective monetary policy is implemented by actions, such as that of the SNB and not by words.
Now the SNB is being blamed as unreliable for ending its currency purchasing programme. In fact, SNB has proved its reliability in monetary policy.
Foreign institutions ran into problems with open liabilities in CHF. It appears that banks outside Switzerland showed losses and a few financial institutions are in trouble. Banks, mainly in Central Europe suggested that their clients took debt in CHF, especially for property financing, because of the low interest rates. Communities and institutions in the eurozone also financed themselves with loans in CHF.
It is difficult to understand how financial professionals in banks and institutions never learn the danger of incurring liabilities in foreign currencies. It is irresponsible for banks to suggest to their non-professional clients that they should take foreign currency credits to buy houses and apartments. Blaming the SNB for the bad outcome is ridiculous.
When the SNB’s stabilisation programme was introduced in September 2011, after months of strong appreciation, it was believed that the European economy would recover, sovereign debt problems would be solved and the euro would stabilise. The programme was therefore geared to be temporary to help the Swiss economy to adapt.
But changes in the eurozone were not carried out sufficiently. The euro remained weak and this has accelerated lately. It was obvious throughout the entire currency purchasing programme that it could not continue forever.
Statements by the SNB that the purchasing programme was an important pillar did not necessarily mean it would continue forever.
Criticising this decision is either naive, an expression of frustration by the IMF and other monetary policymakers about their own ineffectiveness, or an excuse for mistakes in decision-making.
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