The 15th of January was a doomsday on the financial markets. The Swiss National Bank (SNB) decided to stop protecting the exchange rate of franc against euro. As a result, the traders started acting crazy which resulted in a massive appreciation of the franc. Since then the situation cooled down a bit (now EURCHF is around 1.06, comparing to 0.98 on the 15th of January), however the implications of the decision of the central bank are sound and clear until now.
What are the effects of unpegging?
Those implications can be divided into two main categories: external and internal. In the developing countries of Central and Eastern Europe, such as Hungary, Czech Republic or Poland, it was very common for the wealthier citizens to take loans in the foreign currency, which usually was Swiss franc. Due to a massive appreciation of the Swiss currency, the borrowers saw their monthly installments increasing by up to 15%. The reactions of governments of countries in interest varied; Hungary decided to redenominate the loans from francs to forints based on the exchange rate from the 14th of January. On the other hand, Polish authorities decided to wait for the development of the situation and only instructed the Polish banks to remind their clients about so-called credit holidays for the duration up to six months, which are available for any long-term loan.
Notwithstanding, the effects of the decision on the economies of other countries will not be the main focus of this article. Although it might seem nice for the Swiss to go on holidays now as they are able to buy more for less money than before the unpegging, looking at the situation from the macroeconomic perspective, overestimation of the domestic currency is not desirable for the Swiss companies.
Credit Suisse estimates that because of the change of franc’s exchange rate the Swiss economy will lose 18 billion francs
A very accurate measure of the condition of the country’s economy is the reading of the PMI. Purchasing Managers Indices are the economic indicators based on the monthly surveys of private sector companies. The PMI for January was equal to 48.2 points, which reflects the drop of 5.4 points when comparing to December. It is the biggest monthly drop since November 2008. Such a situation is an aftermath of SNB’s decision and the fact that the Swiss companies were not prepared for it.
In order to fully understand the scale of a problem, the transactions of the Swiss companies need to be analyzed. 45% of all transactions are realized in euro with only 42% done in franc. In addition, a large proportion of the sales (39%) are realized in euro, while when it comes to franc and dollar those values are 46% and 11% respectively. The savings of the Swiss consumers on their shopping will be overshadowed by the losses on sales, as Credit Suisse estimates that because of the change of franc’s exchange rate the Swiss economy will lose 18 billion francs.
Impact on the Swiss companies and conclusions for future
Apart from the change in exchange rate, SNB has imposed negative interest rates. Such interest rates cause the money to lose face value over time. As a result, companies will need to review their assumptions used for financial reporting. These include inflation, salary increases or interest crediting. Companies may also be motivated to accelerate payments whenever possible as pension commitments will be now more expensive, companies will need to consider whether to settle with much smaller sums instead.
The authorities of SNB are aware of the situation. As a result, Thomas Jordan, the head of SNB, has admitted that the Swiss franc is still too strong and the SNB may intervene in order to depreciate it. Such commitment that the SNB will remain active on the foreign markets sends a strong signal to the world that the Swiss economy is unable to cope with an overvalued franc and, in the long run, it will approach the level from before unpegging.