132 billion loss? No problem for Switzerland

From a financial point of view, Switzerland often evokes an image of soundness, banking secrecy and prudent financial policy. Nevertheless, the Swiss central bank managed to lose more than 100 billion francs last year. The financial pain of that loss is not too bad.

Switzerland seems to have turned dullness and predictability into an art. The country has been aloof from all European wars for hundreds of years. Switzerland also understands the art of being as inconspicuous as possible in other respects. This is nicely summarized in a quote from the movie The Third Man: with the Borgias in power, Italy went through a period of thirty years with war and terror, but that resulted in Michelangelo, Leonardo da Vinci and the Renaissance. In Switzerland, with five hundred years of democracy and peace, they have not gotten much further than making the cuckoo clock."

New financial crisis?
Fair is fair: the finances of the Swiss central bank (SNB) are a lot more exciting than you would suspect based on history. Provisional figures released by the bank on Monday show that a loss of no less than 2022 billion francs was incurred in 132. These kinds of red figures quickly call to mind the malaise during the financial crisis of 2008/2009. At the time, many banks ran into major problems and incurred huge losses. Major differences with fourteen years ago are that the SNB is not a private bank that has to be rescued by the government and that the mega loss is not caused by mismanagement.

Investing abroad
The central bank is aiming to steer inflation towards a level of just under 2% over the medium and long term. In addition, the SNB wants to prevent the franc from rising too fast in value. This undermines the international competitive position of the Swiss business community. As part of this policy, the bank buys all kinds of foreign assets with its own francs, such as shares in Amazon and Starbucks. The mega loss is caused by the fact that stock and bond prices fell sharply in 2022. Because the franc rose compared to many other currencies last year, exchange rate differences also contributed to the loss.

Catching up with the euro
For central banks such as the SNB, these kinds of paper losses have little effect. The most noticeable effect is that this year the bank will not pay dividends to its shareholders: the national government and the cantons. In any case, the red figures have no effect on currency markets. There, the exchange rate of the franc is mainly determined by developments in the financial markets and on the interest rate front. And since there is less demand for francs as a safe haven in uncertain times and because the European central bank wants to raise interest rates faster than the SNB, the euro has already caught up quite a bit on the franc.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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