Lose $51B? No Big Deal for Swiss Central Bank

Buy euros (EUR) and sell Swiss francs (CHF): that was what the Swiss National Bank (SNB) was doing until early this year when the cost of keeping Swiss exports competitive vis-a-vis those of Europe by effectively pegging CHF to EUR became unsustainably high. Hence, when Switzerland's central bank stopped pushing down the value of the franc to match the euro, the result was a massive loss on its accumulated foreign exchange--mostly euro--holdings.

But how much was the loss? Try $51B for size. Even for a wealthy--albeit rather small--country like Switzerland, that's nothing to sneeze at. Still, the effects of such a loss on monetary policy are limited since its economic situation remains largely the same: an overly strong CHF would dent export performance compared to its devalued European competition:

Losing 50 billion francs ($51 billion) in half a year might seem like a big deal, unless you're the Swiss National Bank. For the majority of economists in Bloomberg's monthly survey — 15 of 23 — the record shortfall reported last month doesn't matter for SNB policy. That still leaves a sizable group in the other camp; one concern is that such a loss could make it harder for President Thomas Jordan to push back against any market pressure on the franc with interventions.

The SNB has already cut its deposit rate far below zero — charging banks to hold their money — and built up hundreds of billions of francs in reserves, by defending a currency cap until January this year and now through occasional forays into the market. If losses mount, investors could start to buy francs to a greater degree if they question the SNB's firepower.

So, it's a market test for Swiss intervention capabilities. That said, there's little choice other than tho pursue open-market operations (AKA intervention) after monetary policy tools have been exhausted:

The loss "limits the credibility of the SNB to pursue a monetary policy that might come with short term financial losses," Bank J. Safra Sarasin Ltd Chief Economist Karsten Junius said. "Unlimited foreign-currency interventions are therefore not credible as markets would regard them as unsustainable..."

According to the survey, the SNB has limited room left on the interest-rate front to keep the franc in check, meaning interventions are likely to retain their importance. The SNB can take its deposit rate, currently at minus 0.75 percent, to minus 1.25 percent, according to the survey...

"From a monetary point of view, the loss does not matter," said Maxime Botteron, economist at Credit Suisse Group AG. "The SNB can still operate with negative equity."

Central banking in an age of deflation may not seem as fun as it seems. I too would like to give negative deposit rates, but a $51B loss remains hard to swallow no matter who you are.