Desperate Swiss eye euro peg to repel safe-haven flood

Section:

And when the Swiss franc is closed as a safe haven amid the worldwide storm of currency devaluation, what's left as a safe haven but gold?

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By Ambrose Evans-Pritchard
The Telegraph, London
Thursday, August 11, 2011

http://www.telegraph.co.uk/finance/financialcrisis/8696289/Desperate-Swi...

The Swiss franc retreated against the euro in a wild one-day move on Thursday after top officials at the Swiss National Bank (SNB) floated ideas for a temporary euro peg, a once-unthinkable move.

"Nothing is excluded," said Jean-Pierre Danthine, a SNB board member. "The situation is extremely complex and difficult. There is no magic wand."

The Swiss franc has moved with gold over recent weeks, acting as a magnet for capital flight from the discredited debt currencies of the West. The SNB said the franc is "massively overvalued" and has moved into dangerous territory over the past month.

The hotel and restaurant lobby GastroSuisse said the 240,000-strong tourist sector was in an "extremely precarious" state, while the machine tool industry risks major layoffs and loss of investment to foreign sites.

... Dispatch continues below ...



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The SNB has already flooded the banking system with SwFr 80 bn (L65 billion), a vast sum for a country of less than 8 million people. This was overpowered by a wall of money on Wednesday after contagion hit French banks and the US Federal Reserve pledged to hold rates near zero until mid-2013.

The SNB has since gone further, hinting at unlimited liquidity through swap transactions. Short-term rates have fallen below zero, leading to "negative carry" to deter hedge funds, but this may not be enough.

Kurt Schiltknecht, the SNB's former chief economist, said every measure used to curb inflows in a similar crisis in 1978 proved a "failure," including negative rates.

Eventually the bank set a target against the Deutschmark (10 percent above market levels) and pledged to buy foreign currency with printed francs for as long as it took. "It worked well. After some hesitation, the market became convinced," said Mr Schiltknecht. A euro peg would be similar.

Thomas Jordan, the SNB's vice-president, said a "temporary link with Europe's common currency" might be allowable under the bank's mandate so long as it did not compromise Switzerland's monetary independence.

Hans Redeker, currency chief at Morgan Stanley, said Swiss companies have been shielded so far by currency hedges taken out two years ago but these contracts are expiring. "They are running against the clock. The Swiss economy has been stable until now because exporters are still operating at the earlier exchange rate. There could be significant problems next year."

Denmark has avoided Switzerland's fate by pegging to the euro, though the model may be hard to replicate. "Nobody is speculating with the Danish krona. I think a euro peg could work if the SNB is willing to defend the level by creating as much liquidity as needed," said Mr Redeker.

The franc came within a whisker of parity against the euro this week before moving back to SwFr 1.08. It was trading above SwFr 1.65 to the euro before the credit crisis in 2008. Sterling has more than halved against the Swiss currency in just three years.

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