Posts filed under “Currency”

Switzerland – Chapter 2

Switzerland – Chapter 2
David R. Kotok
January 16, 2015

In the wake of Switzerland’s removing the cap on the Swiss franc’s value against the euro, debt owed by non-Swiss agents has become an emerging issue. That debt, denominated in either Swiss francs or in euros, is secured by collateral outside of Switzerland. Is this an unfolding foreign-currency-related debt problem? The answer appears to be yes.

Russian businesses secured loans denominated in low-interest foreign currencies, including the Swiss franc. The franc was then pegged to the euro. The collateral for the loans depended on an assumption of $100 oil and a Russian ruble that has since plummeted. It appears that some of these agents now cannot pay.

Real estate speculators in Warsaw pledged their real estate to secure loans in Swiss francs. Why? The interest rate was very low – much lower than if they had borrowed in zlotys. Or they borrowed euros with the assumption that the Swiss peg against the euro would remain in place.

These borrowers around Europe and elsewhere in the world pledged collateral, took on foreign-currency risk, and based the risk-taking on the commitment of the Swiss National Bank (SNB) to maintain its currency peg at 1.2 francs to a euro. Many of these borrowers are now sweating bullets.

Markets around the world are reacting in fear of contagion that could result from these debts. Is the reaction rational? We shall find out in due time.

We do not know how much debt there is, who the borrowers are, or what banks and intermediaries are involved in the loans. We do not know what supervision and regulation have been applied, since this is activity that is mostly outside the US and thus not supervised under the post-Dodd-Frank regulatory regime.

Markets can handle good news, and they can handle bad news. Markets have trouble, however, with uncertainty. The pressure on stock markets and the volatility that has spiked due to the SNB’s move are the results of rising uncertainty about the foreign-currency-denominated debt and abrupt changes in central bank policy.

The Swiss have punched new holes in their cheese. They have boiled their chocolate so that it smells bad. They committed to a course, reversed themselves, and have now lost their credibility. This is the second governor of the Swiss central bank who has suffered a loss of credibility. The first one had to resign because a member of his household was allegedly trading a foreign currency position against the euro peg. The second governor has derailed billions in loans and pressured his citizens through his unexpected policy change.

When one central bank loses its credibility, all central banks suffer. The burdens on the Federal Reserve, the European Central Bank, the Bank of Japan, the Bank of England, and others have now intensified.


David R. Kotok, Chairman and Chief Investment Officer


Category: Currency, Think Tank

FR, ECB, BoJ: Central Banking’s Grand Experiment

Central bankers, most of them versed in the history of the Great Depression and deflation, haven’t been exactly reading from the same hymnal for the past few years. There are signs, though, that this might be changing. Perhaps it is merely a coincidence, but the U.S., with the most activist central bank and after more…Read More

Category: Currency, Federal Reserve

US & the EuroZone

The 2 major data points during the week were December CPI data for the EuroZone (EZ); and US December non-farm payrolls. EZ December CPI came in at -0.2% Y/Y, weaker than the decline of -0.1% Y/Y and below Novembers +0.3%. However, core inflation rose to +0.75%, up from +0.67% in November. The data is yet…Read More

Category: Currency, Data Analysis, Think Tank

BIS: Currency movements drive reserve composition


Category: Currency, Think Tank

The Russian Laundromat

Source: OCCRP From OCCRP: Call it the Laundromat. It’s a complex system for laundering more than $20 billion in Russian money stolen from the government by corrupt politicians or earned through organized crime activity. It was designed to not only move money from Russian shell companies into EU banks through Latvia, it had the added…Read More

Category: Crony Capitalists, Currency, Digital Media, Finance, Legal, Politics

Category: Currency, Technical Analysis, Think Tank

The Return of the Dollar

The Return of the Dollar John Mauldin November 13, 2014     Two years ago, my friend Mohamed El-Erian and I were on the stage at my Strategic Investment Conference. Naturally we were discussing currencies in the global economy, and I asked him about currency wars. He smiled and said to me, “John, we don’t…Read More

Category: Currency, Think Tank

Currency Markets Are Rigged

Big Banks Busted Massively Manipulating Foreign Exchange, Precious Metals … And Every Other Market Currency markets are massively rigged. And see this and this. Reuters notes today: Regulators fined six major banks including Citigroup (C.N) and UBS (UBSN.VX) a total of $4.3 billion for failing to stop traders from trying to manipulate the foreign exchange…Read More

Category: Currency, Gold & Precious Metals, Legal, Think Tank

1933: Colombia Experts Oppose Gold Plan


Category: Currency, Inflation, Really, really bad calls, Think Tank

King Dollar vs Euro, Yen Renminbi

click for giant graphic Source: FT   The U.S. dollar is still king of global currencies. The dollar made up 60.9 percent of foreign exchange reserves and was used in 42.1 percent of global payments. Some countries, though, contest how much influence the U.S. dollar really has. The term “exorbitant privilege,” coined by former French…Read More

Category: Currency, Digital Media, Politics