Monday, January 19, 2015

SWITZERLAND MAY BE PREPARING FOR THE END OF THE EURO

AFP PHOTO / FABRICE COFFRINI

Something is brewing in Europe now that has the Swiss National Bank worried.

If you haven’t been paying attention in the last 24 hours, the currency and equity markets have been rocked by a surprise move to delink the existing currency peg between the Euro and the Swiss Franc. This move has set off what many are calling a “financial tsunami” that could leave behind a path of destruction across the continent.
Waking up to find that the local Swiss ATM will not dispense Euros may be viewed as a short-term inconvenience to the average man on the street, but learning that depositing your money in a Swiss bond with maturities of less than 7 years will cost you money, is catastrophic. It is worth repeating, if you lend or deposit your money with the Swiss, they are going to charge you, not pay you.
Negative interest rates are never a sign that things are getting better–quite the opposite. The current yield curve movement indicates a growing concern that things are deteriorating. The further out on the curve the negative rates go, the greater the perceived danger. From the recent moves, many would conclude that Europe is in serious trouble. Yesterday, the Swiss stock market responded by crashing–experiencing its worse daily drop in over two decades, while its currency skyrocketed.
Central bankers gave the market no advanced warning of this decision, raising the specter of “why now?” What is on the horizon to cause such a drastic move since this non-orderly response is akin to running for the exit in a crowded theater before someone yells “fire”? Most currency moves are gradual in nature, like watching a glacier move. This type of disruption has the hallmarks of panic.
The Swiss have been trying for years to manage the imbalance of monetary policies across the Euro zone. Linking together nations like Germany and their irresponsible cousin, Greece, has been a recipe for disaster since inception. The very idea of balanced budgets and fiscal constraint are such foreign concepts among the various participants.
Many would argue that the storm clouds have been building for some time and that the very notion of a lasting unified currency was doomed to fail from the start. The question for most has always been about the timing, and the degree to which Germany, in particular, would continue to carry the other nations who couldn’t stay within the set guidelines of membership. The day of reckoning may be at hand.