Press unswayed by “placebo” franc cuts

Newspapers said measures to adjust the Libor rate were symbolic Reuters

Swiss newspapers have largely criticised central bank measures to counter the rising franc as being merely symbolic.

The Swiss National Bank (SNB) on Wednesday reduced official interest rates by 50 basis points to a target range of 0-0.25 per cent. It is the first time the SNB has lowered the interbank Libor rate since March 2009.

The bank said the franc was “massively overvalued at present” and it was aiming for the three-month Libor at “as close to zero as possible”.

The steps will have no more than a “placebo effect”, commented the Tages-Anzeiger.

“The measures themselves are mainly rhetoric and in their specifics so technical that only financial experts will really be able to understand them,” noted the newspaper.

“The prescription could have been made by a doctor, sitting across from a patient with a chronic illness, and not wanting to give the impression of doing nothing to help. There isn’t much he can do, so he prescribes a placebo. So everyone thinks something is being done. But the chronic suffering continues.”

For weeks the central bank had been accused of “living in the past”, and it took the meteoric rise of the Swiss franc before the Swiss National Bank decided to take action, said La Liberté.

And yet, the decision was symbolic, it said, as the Libor is anyway approaching zero per cent. “The interbank market of borrowing in Swiss francs has hardly reacted,” UBS analyst Thomas Flury told Thursday’s edition of the newspaper.

In its editorial, Le Temps agreed. “The markets reacted in the first hours but it very quickly became clear that the measures announced were symbolic, soon erased by the scale of the problems causing the rise of the franc.”

For the paper, the Swiss franc, like the Canadian and Australian dollars, are acting as refuges in a world that has “lost confidence”. 

“The franc is an anchor like the Deutsche mark before it, but it is so small that the waves from the markets risk sweeping everything else up in their path. Obviously the SNB has not exhausted all its resources, but from the tone of its communiqué, one can gauge that we aren’t going to be saved,” said Le Temps.

“The SNB has simply reaffirmed that it is ready to act and it is involved in providing oxygen for a national economy that risks losing air in the coming months.”

“Much ado about nothing?”

Some quarters were relieved by the measures however. Industry, tourism, politicians and the government welcomed the intervention.

“Finally the National Bank is taking action, say representatives of the export industry and tourism. Yet fears of a new appreciation of the franc are great,” wrote the Tages-Anzeiger newspaper.

The SNB must remain firm, businesses say. “Keep printing money until the franc is considerably weaker,” one company boss told the paper. A tourism entrepreneur from Graubünden urged the National Bank to set a target course and stick to it.

The Blick tabloid called it a “smart move”. “Much ado about nothing? No!”, said its editorial. 

“The fact that the National Bank is no longer watching the franc get stronger has made speculators stay away from the franc. It is cheap to criticise the bank because nobody can know how deep the euro and the dollar would have dropped,” it said.

But it’s the rate at which the franc has been rising that is so worrying and the fact that there is no end in sight to the debt crises in Europe and the United States and related currency risks, noted the Neue Zürcher Zeitung.

The SNB now faces a dilemma, warned the newspaper.

“Until a real, structural solution to these crises is found, investors have every reason to flee government bonds and to put their money in the franc market instead. As long as the franc keeps growing in attractiveness as a place of stability in a system of flexible exchange rates it is probable that it will continue to strengthen, bringing the investors profits,” it predicted.

“A fundamental change would only come about if the Swiss economy collapsed, making franc investments no longer stable, or if the bankers succeeded in stopping expectations of a further rise in the franc’s value.”

Shadow currencies

Britain’s Financial Times noted that the “S3 currencies” – the Swiss franc and the Canadian and Australian dollars –  have gained in prominence in terms of daily turnover in global currency markets and in the composition of central banks’ foreign exchange reserves.

Writing in the British newspaper, UBS foreign exchange strategist Mansoor Mohi-uddin said the S3 currencies were now “ruling the roost”. They are increasingly traded in foreign exchange markets, as they “represent an alternative group of ‘shadow currencies’ for investors wishing to take directional views on the world’s three leading economies: America China and Germany”.

“In short, the Swiss franc and Canadian and Australian dollars allow investors to hold a core European currency without the eurozone’s debt burdens, a North American currency without America’s fiscal baggage … and a shadow currency for China’s economy without capital controls or currency pegs.”

But he warned that the situation could “cut both ways”, with a risk of the eurozone debt crisis engulfing other countries and dragging down the Swiss franc too.

Franc on steroids

The Swiss franc is a so-called “safe haven” currency, which means that investors and speculators buy it when other currencies, including the euro and the dollar, are under pressure.

The franc has gained 25 per cent in value against the euro and the dollar over the past four years.

The Swiss National Bank has emphasised that it does not pursue an exchange rate target, but consistently bases its monetary policy on its legal mandate.

This mandate stipulates that “the SNB is required to ensure price stability, while taking due account of economic developments”.

Starting in March 2009 the SNB intervened in currency markets. But after pumping in 15 per cent of GDP in May 2010 to little effect as the Swiss franc surged during the first round of the Greek debt crisis, it dropped them in June 2010. 

These forays led it to a loss of SFr21 billion last year, its biggest ever, and its chairman, Philipp Hildebrand, has faced calls to resign.

SNB first-half loss

The SNB reported a consolidated loss of SFr10.8 billion ($13.5 billion) for the first half of 2011.

Losses on the bank’s foreign currency positions amounted to some SFr9.9 billion.

This was mainly due to exchange rate-related valuation losses of around SFr11.7 billion.

A year ago at this time, the bank recorded a much smaller loss of SFr2.78 billion.

The SNB result depends largely on developments in the gold, foreign exchange and capital markets. Because fluctuations are common, it is not possible to make accurate predictions for the rest of the year.

(With input from Urs Geiser)