SNB implicitely obliges each Swiss to invest 73% of this year’s income into Euros

Our regular spreadsheet shows that the SNB implicitly forces each Swiss to invest 73% of his/her personal income for this year into euros, no matter if the person is employed, a pensioner or an infant. Other currencies take 48.7% of the yearly income, a total of nearly 112% of  the yearly income per capita. This figure was still in April a lot lower, namely 76% and in May 94%. The SNB currently obliges each Swiss to buy every week an average of 600 euros and 400 euros in other currencies, this compared with an weekly salary per capita of 656 EUR. Essentially the central bank forces each inhabitant to give her a loan financed with an overdraft in the people’s personal account.

SNB losses when the peg breaks

If the EUR/CHF peg is broken and the pair falls to 1.10 and all other currencies (USD, JPY, GBP, etc.) behave similarly (i.e. lose 8.6%), then the central bank must realize a loss of 34.2 billion Swiss Francs. The SNB equity would reduce from 60 bln. CHF in Q1/2012 (or 66 bln. CHF in Q2/2012) to 25.8 billion francs.

If, however, the EUR/CHF falls to parity (and other currencies with the same percentage), then the SNB would have negative equity of 7 billion CHF, having lost 67 billion francs, about 10% of the Swiss GDP.

 

The back-fall scenario: Swiss to join the euro zone

 

One might think that the only way-out is that Switzerland jumps into the saving arms of the euro zone. With the increase of the euro share of the SNB reserves things seem to be clear. A rise of the euro against the franc is for us only possible when the Southern European economies see stronger GDP increases than the Swiss one, for us an impossibility for at least 15 years.

We know that Thomas Jordan suggested in the 1999 that Switzerland should neither peg to nor join the euro zone because of a potential inflation risk for Switzerland. We will show in the coming week in detail why this risk is currently not the biggest one for the Swiss if they join the euro; but another risk is far more dangerous than inflation, the risk is called “Target2″.

 

Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and we encourage you to complete your own due diligence when making an investment decision. Even if we often write about Forex trading, our advices aren't written for day traders who follow technical channels, but rather for mid- and long-term investors. Our aim is to show discrepancies between fundamental data and current asset valuations, which can lead in mid-term to an inversion to technical channels.
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