February 26, 2021

Swiss Central Bank Considers a Peg to the Euro

PARIS— Switzerland’s central bank signaled Thursday it was prepared to consider a once-unthinkable step: pegging the nation’s “massively overvalued” currency to the euro, at least temporarily.

Such a move would be a response to the global financial turmoil that has lifted the value of the Swiss franc, which investors consider a safe haven, to levels that are menacing Switzerland’s economy.

The bank could consider “So long as they are compatible with price stability long-term, temporary measures that influence the exchange rate are within our mandatea temporary link with the euro, as long as the measure is compatible with price stability over the long term,” Thomas Jordan, the vice chairman of the Swiss National Bank, said in an interview published Thursday in Bund, a Swiss newspaper.

“Nothing is excluded,” Jean-Pierre Danthine, a member of the central bank’s governing board, added in a separate interview carried in Le Temps, a Swiss daily.

Linking the franc to the euro could not happen overnight, and would face steep legal and political hurdles. But whether the comments reflected a true intent or were meant mainly to sway currency traders, the remarks helped weaken the franc on Thursday, to 1.0747 euros, after it had risen as high as 1.0257 euros earlier. Against the dollar, the franc traded at 74.1 centimes.

The franc, which has surged more than 30 percent against the euro in the past year, hit a record 1.0075 on Aug. 9.

Pegging the franc to the euro would be considered a drastic move, and the fact that policy makers are discussing it signals that Switzerland is running out of options to manage its runaway currency even as its economy shows signs of slowing.

The Swiss economy, which grew 2.6 percent last year, is expected to slow in coming months as the strong franc makes Swiss-made goods less competitive, especially in Europe, its biggest exporting bloc.

The strong franc is also causing havoc thousands of miles away, in Hungary, Poland and other parts of central Europe, where large numbers of borrowers took out home loans in Swiss francs or euros in recent years to take advantage of lower interest rates outside their own countries.

In Hungary alone, where an economic recovery has faltered recently, about 700,000 homeowners hold mortgages and others loans that were borrowed in francs when the Swiss currency was weaker. A stronger franc makes those loan payments more expensive. Alarm is growing, and Hungary’s financial market supervisory authority warned Thursday that large numbers of foreign currency loan holders would be late with repayments.

Despite Swiss authorities’ efforts to stem the franc’s surge, recent actions — including cutting interest rates close to zero last week and raising the supply of cash in the franc money market this week — have practically fallen into a black hole.

A peg to another currency is considered anathema to many Swiss, who have prided themselves on not joining the European Union, not to mention the euro monetary union, which they believe would only weaken the nation over time.

In any case, a peg would require changing the Swiss constitution, which has regulated the currency since 1850. And it would mean the Swiss central bank would risk ceding some of its independence to the European Central Bank, which manages the euro. It was also not immediately clear how a peg would be implemented at a technical level.

A euro peg “is certainly not the easiest plan to put in place, either politically or legally,” Mr. Danthine acknowledged.

Business people and Swiss citizens would also be loath to see their cherished currency linked to a European monetary union gripped by crisis.

Pegging the currency would be “a big risk,” Thomas Christen, the chief executive of Reed Electronics, a Lucerne-based company, said in a recent interview. “Then you can’t move; you are not free and our reasoning in Switzerland is to be free in these decisions.”

Some politicians had recently floated the idea, he added, “but a lot of Swiss people don’t want to do this step.”

Still, the strong franc has already hit big industrial firms like Clariant and Lonza, two chemical makers. Swatch, the big watchmaker, recently warned about the “extremely problematic” run-up in the currency, even though it reported record half-year profit and sales.

Swiss exporters like Mr. Christen have had to hedge against sharp fluctuations in the currency, and many more Swiss businesses have already been hit at the margins. Many are starting to buy cheaper materials to make even high-caliber products in order to offset the cost.

OSEC, a large trade group that represents Swiss businesses, said it has been encouraging Swiss firms to sell more goods in emerging markets and the Middle East in order to offset the exporters’ traditional dependence on Europe and the United States.

And many will simply be forced to become more innovative. “Because we’re not a big country we can move very fast, and try to use this as an opportunity to become more competitive,” Mr. Christen said.

In the meantime, “the problem is the rest of the world knows Switzerland is safe,” he said. “But we don’t say, ‘be careful,’ because it will also make our economy go down.”

Article source: http://www.nytimes.com/2011/08/12/business/global/swiss-central-bank-considers-pegging-franc-to-the-euro.html?partner=rss&emc=rss

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