Swiss Franc, the symptom, the illness, Capital and agreement.

Dear,
One of the most lucrative investments on the last 9 months has been speculation in foreign currencies.

As the economic situation worsened in Europe, with lack of confidence in the solvency of the Banking system and rising concerns of dramatic split of the Euro-zone, investors have moved quickly towards so called safe haven investments.

A very popular investment has been the Swiss Franc, and as investors took positions in Swiss nominated assets, markets pushed up the price of the currency.

On the other hand, Swiss economy is very open (exports represent approx. 55% of Swiss GDP, with the Euro-zone as its main trading partner).

As the revaluation of Swiss Franc would represent a serious threat to Swiss economy, Swiss National Bank introduced a fixed exchange rate policy between Swiss Franc and Euro last September (1 Euro = 1.2 Swiss Francs).

In order of fixing the EUR/CHF Forex rate, the Swiss National Bank has become one of the most active Forex traders this year, selling Swiss Francs and buying Euros.

As a consequence the Swiss National Bank has increased its exposure to Euros nominated assets to a level which can be risky in the medium term (SNB reserves in Euros has risen from 51% in March to 60% by June www.snb.ch/en/iabout/assets/id/assets_reserves).

And for making it worse, the potential losses of these exposures will be profits for the speculators; there are no gains in this game for the Swiss people.

Confidence is the key word here; panicking markets are not allocating capital in growth generation activities but in speculative actions. Again, we’re wasting Capital when we cannot afford to do it.

The real problem is the unsustainable debt of Europe problematic countries (around 400% of their GDP). This is the illness which is killing the economy, and markets will not calm down till lenders and borrowers agree on the mechanism to move those debts to more sustainable levels. By the way, US debt is also very scary; we’ll see what happens with it in some months.

Until this problem is tackled authorities are just buying time by wasting capital.

The key concept here is trading sovereignty for debt reduction.

At the end this is logical, lenders demand guarantees that borrowers will pay their debt, and borrowers will have to allocate their limited Capital to productive activities oriented to pay their debt.

Obviously the above statement has deep social, political and economic implications, that’s why we are in a systemic crisis.

Looking forward to read your opinions.

Ferran.

August 11th, 2012