One of the features of the “new normal” of the credit crunch era is that central banks bestride the economic and financial stages like colossi as they dispense both cash and claimed wisdom. Many are in thrall to our central banking overlords but not here as it was only yesterday I discussed their inconsistencies and fudges when setting interest-rates. This morning has brought news of yet another set back for the theory that central banks are omnipotent and it has come from the often sleepy small country of Switzerland. Indeed Swiss citizens are likely to get something of a shock when they read the news and discover what has been done in their name and with their money.
The Swiss National Bank (SNB)
The latest release from the SNB is not for those of a nervous disposition especially if you happen to be a Swiss taxpayer.
The Swiss National Bank (SNB) is reporting a loss of CHF 50.1 billion for the first half of 2015.
If we convert into UK Pound’s then this is £33.3 billion. So how did this happen?
On 15 January 2015, the SNB decided to discontinue the minimum exchange rate of CHF 1.20 per euro with immediate effect. The subsequent appreciation of the Swiss franc led to exchange rate-related losses on all investment currencies. For the first half of 2015, these amounted to a total of CHF 52.2 billion.
Thus we see that it was not only private investors, currency and spread trading companies (some went bust back then) and hedge funds which were hit as a modern version of King Canute finally submitted to the tide. Added to this were problems with bond markets which if you recall have followed the surge of early 2015 with declines since and remember due to the size of its foreign currency intervention and reserves the SNB is a large holder of Euro area bonds.
A loss of CHF 3.9 billion was recorded on interest-bearing paper and instruments.
The SNB must think that it never rains but it pours as it note that it has been a bad 2015 so far for something which it is famous for holding which is of course gold.
A valuation loss of CHF 3.2 billion was recorded on gold holdings.
So far we have too many losses so let me factor in something which is immediately obvious when you think about it. The SNB makes a profit out of its negative interest-rate of -0.75%.
The profit on Swiss franc positions totalled CHF 571 million. It was essentially made up of CHF 530 million of negative interest charged on sight deposit account balances since 22 January 2015,
Also the SNB received some interest payments on its various bond holdings.
Interest income provided a positive contribution, at CHF 3.5 billion,
Thrown into the mix is something that does not get the publicity it deserves outside of on here anyway as the SNB is an equity market punter, excuse me investor. Like the Bank of Japan which owns nearly 7 trillion Yen of equities the SNB has spread its wings into this area. As the early part of 2015 was good for equities the SNB can breathe a small sigh of relief and publish this.
By contrast, equity securities and instruments benefited from the favourable stock market environment and contributed CHF 4.1 billion to the net result……. as did dividend income, at CHF 1.2 billion.
What about Apple?
Some wry entertainment has been found in this development described by Bloomberg on the 6th of May.
Switzerland’s central bank owned 8.9 million shares in the iPhone maker on March 31, according to a regulatory filing made to the U.S. Securities and Exchange Commission. That’s up from 5.6 million shares at the end of 2014, a 60 percent increase, according to Bloomberg calculations.
We do not know the exact state of play here but we do know as Apple’s share price peaked at around 132 and was 122.35 at last night’s close that it is no longer solely a one way trade. Should it not work out then I imagine that the Swiss watchmaking industry will be particularly underwhelmed by their central bank investing in the maker of the Apple Watch.
Balance Sheet Alert
As of the 30th of June the SNB owned some 529.5 billion Swiss Francs of foreign currency assets and some 36.4 billion Swiss Francs of gold. If we look at the investment percentages then we see it held some 90 billion Swiss Francs worth of equities with the vast majority of the rest in other countries government bonds.
This is an awkward consequence of the foreign currency intervention undertaken by the SNB and if you have heard people describe central banks as hedge funds these days well here is the prima facie case of it.
Is the SNB bust?
The answer to this is not yet as the capital has shrunk for obvious reasons as we note a fall in capital from 86.3 billion Swiss Francs to 34.3 billion. If it was a listed company then we might be heading to the panic zone but of course it is not. Swiss taxpayers may be getting nervous at this point because they via the Swiss Treasury back the SNB. Also as pointed out a few years back by Willem Buiter central banks do have access to a large source of funds.
As long as central banks don’t have significant foreign exchange-denominated liabilities or index-linked liabilities, it will always be possible for the central bank to ensure its solvency though monetary issuance (seigniorage).
A sort of printing response or in modern language press control and the letter P.
Also it is not that central banks cannot go bust as we review one obvious past problem and one less obvious one.
Two recent examples are the Reserve Bank of Zimbabwe (the current inflation rate in Zimbabwe is over 100,000 percent year-on-year) and the National Bank of Tajikistan.
I have written before about issues concerning the structure of the ECB (European Central Bank) partly because it is backed by 19 different treasuries which may copy their attitude to the Greek crisis and have divergent views. However the Swiss taxpayer may null the fact that 40.02 of their central bank is owned by private shareholders. I know nothing about Theo Siegert of Dusseldorf but according to the 2014 Annual Report he owns some 6.5%.
What about Switzerland?
There is an explicit issue for the shareholders in the SNB.
Last year, the SNB paid dividends to shareholders of 2 billion francs after posting 38.3 billion francs in profit but warned such hefty payouts might not continue.
We have the second half of 2015 to come but the outlook for a dividend this year is none to bright as we stand. Also there is the issue of currency strength finally being a drag on the economy. The BBC has looked at its impact on border towns.
The consequences for borders towns like Kreuzlingen were immediate. While Swiss prices have been somewhat higher than those in Germany for some years, with the franc now so high many products cost twice as much or more in Switzerland.
So why shop in Kreuzlingen when ten minutes walk away the bustling German town of Konstanz awaits?
Also Swiss cheese manufacturers are being affected.
“In May our foreign sales figures, especially for traditional cheeses, really slumped”, says Mr Hausammann. “We had a 14% reduction over the same month last year.”
This week has seen more than a few examples of central banking problems. It was the Bank of Russia on Wednesday with the value of the Rouble and consequent inflation and yesterday it was the US Federal Reserve and the Riksbank with doppelgänger like views on economic policy. Now we see that there are costs to the “unlimited intervention” policy of the SNB which of course turned out to be very large rather than unlimited. Perhaps the Swiss taxpayer will end up being very grateful for that!
Meanwhile back in the UK another central bank seems to have hit some choppy water. From Reuters.
New Bank of England rate-setter Gertjan Vlieghe should reassure parliament that his ongoing financial link to one of the world’s biggest hedge funds does not pose a conflict of interest, a senior MP said on Thursday.
What could go wrong?