Swiss Central Bank Leaves the Sinking Ship, Drops Parity with the Euro

The Swiss National Bank (SNB) sent shock waves through financial markets Thursday, by suddenly removing its “peg” to the euro — at 1 euro = 1.20 CHF or higher — which it had maintained for three-and-a-half years, and lowering its discount rate to a truly extraordinary minus 0.75%. Stock markets plunged, foreign-exchange traders lost billions in minutes, ATMs refused to give euros, as the Swiss franc immediately leaped 30% above parity with the euro. It then slightly adjusted back to about 1 euro = 1.035 CHF. The Swiss stock market particularly plunged, due to fears of export drops as consequence of the new parity.

SNB chairman of the governing board Thomas Jordan, in a press conference, stated that the reasons for the decision were not domestic but international. He did not say more. But the Swiss daily Tagesanzeiger indicates that they are: 1) The coming QE from the European Central Bank; 2) The Greek elections.

Due to the desperation of the bankrupt and sinking Eurozone banks, the European Central Bank (ECB) has now made clear, in a statement Jan. 11 by French ECB board member Benoit Coeuré, that the ECB will announce, at its Jan. 22 meeting, “quantitative easing” by buying Eurozone government bonds from those banks. The surprise Swiss central bank move (Switzerland is not in the Eurozone) can be taken as a clear sign that the ECB bank-bailout-bondbuying coming next week will be very large, and will drive the euro into the cellar. Wall Street wants the ECB to buy 4.5 trillion euros of government bonds from the banks.

The Swiss measure was inevitable, as the 1.20 parity was unsustainable in the longer term. It cost an unbalanced reserve basket at the SNB, which, through the constant purchases of euros, had reached the equivalent of $500 billion in euros. These reserves will accordingly lose value; some estimates are that the SNB itself lost $50 billion today.

However, the decision to drop the parity now, as hinted by Jordan, shows that the Swiss are leaving the sinking ship. Keeping parity with the euro means to follow the same monetary policy as the ECB, which the SNB has done so far, but the coming QE is too much. Furthermore, “Greek elections” means a feared fatal tsunami for the euro.