A tsunami from Switzerland
The Swiss National Bank has abandoned the peg that it put in place in 2011 to keep the exchange rate at 1.2 Swiss francs per euro. And the decision instantly caused fluctuations in the global money flow. Switzerland has been the safest haven for funds trying to dodge variables like the falling international oil price, the possibility of quantitative easing by the European Central Bank and the slowdown of the Chinese economy. Prices of major sovereign bonds and various derivative products drastically fluctuated. Hong Kong’s financial secretary called it a “tsunami” from Switzerland.
Interestingly, the stock market in Switzerland fell by 9 percent after the SNB announcement. Exporting businesses in Switzerland would obviously be affected, as they had benefitted from the fixed exchange rate. It also means that Switzerland would assume a certain loss in the financial industry known for its secrecy. Now that the fixed exchange rate has been abolished, the pivot of the financial monetary policy is shifting in the opposite direction of the financial industry after three years and four months.
At the same time, hidden discord in Switzerland is likely to surface. To us, Switzerland seems to be a financial industry-oriented nation. But Switzerland suffers from intense disputes between its financial and manufacturing industries. A Swiss politician I met at an IMF conference in Singapore in 2012 said that it was a shame that the country was perceived as focused on financial businesses. Businessmen in manufacturing even call the bankers “gnomes.”
But the SNB decision will only help the gnomes. In fact, secret accounts in Switzerland were in jeopardy. As the United States, Germany, the United Kingdom and France tracked down tax evaders, secret accounts in Switzerland became the primary target. As a result, the money in these secret accounts left Switzerland for Singapore and Russia.
Now, the funds are likely to flow back to Switzerland. Switzerland has relatively low uncertainty of inflation, and the value of its currency is rising. Depositors can gain just by keeping money in Swiss banks. Those who couldn’t find better alternatives and had purchased U.S. and Japanese treasury bonds are likely to move their money to Switzerland, even at a negative interest rate. This year, the global financial market will be full of turbulence.
The author is a deputy editor of the international economy team of the JoongAng Ilbo.
JoongAng Ilbo, Jan. 19, Page 30
by KANG NAM-GYU