In a sudden and totally unexpected way the Swiss National Bank released the franc rate on January 15, raising the artificially fixed rate of 1.20 EUR/CHF. It was all so sudden that even Christine Lagarde, the IMF director, seemed surprised. Financial markets in the 21st century – purest theatre.
Tragicomedy is playing on the stage today. Only the few members of the “inner circle” are having fun. However, there are only a few smart people who seem to understand why the exchange rate is going up at once and down at another time, and they can explain all the rather crazy moves. Most people do not care about the correlations, nor do they care how lucky people manage to make their first million. Until the markets get out of control. That’s the time when the ones on top are playing tragedy and the ones on the bottom may suffer.
Hope in the common currency
The same way as for example thousands and thousands of people in Poland, Croatia and Austria; people, who have taken loans on a Swiss franc basis in better years, because their banks were able to offer them the best conditions in this currency. (It is true that the interest rates offered in Japanese yen could even beat the franc, but this Far Eastern currency was scary for even the most daring Europeans.) When someone is taking a loan to build a house or buy a car, he believes in the future, in his own development and that of the society where he is living.
When someone in Austria decided to take a loan in francs, he believed in the future of the euro, trusted in a common currency resting on strong shoulders. If someone did the same in Central-Eastern Europe outside the eurozone or even in a country that was not a member of the European Union, he proved real optimism, trusting in the integration process of his country, which promised to result being the member of the club of lucky ones. Looking at them from outside, namely from the perspective of an Eastern European, these societies, the European Union and the eurozone, must have looked like some sort of promised land.
Nothing will be as it used to be
The rude awakening came when the US markets hit the floor in 2008. From that point the actors overseas where playing wrong notes, however the sensible Europeans were broken in self-reproach. The radical cure that was burdened on Europe due to the crisis was what made Europe really sick in the first place. This is how it can happen that six years after the crisis we are still paying the bills. Who knows for how much longer, since as opposed to America, nothing here will ever be as it used to be before 2008. Among other reasons because thousands and thousands of Europeans have debt in Swiss francs.
Namely as the crisis spread to Europe from overseas the EUR became the target of the markets. The speculators sent the EUR on a downward course for a number of reasons: from the usual exchange rate of 1.60 in peaceful times it continued downwards to 1.50, until the parity to the USD was reached on 9 August 2011 (on that day alone the EUR lost about 6% of its value).
That was too much even for the Swiss National Bank (SNB); they said goodbye to a basic principle of free market economy and they tied the minimum exchange rate of the EUR to the CHF rate at 1.20. This served as a barrier for gamblers: they could bet on a strengthening EUR but as soon as they favoured the CHF and were driving the exchange rate against the artificial barrier, the SNB intervened. This cost the monetary authority a lot of money.
Today the balance sheet of the central bank in Zürich shows foreign currency holdings of over CHF 500 billion – three times as much as in 2008. The problem of the Swiss lies in the loss that is threatening their foreign currency reserves. The concerns of the real economy are not that serious: the Swiss exporters had more than three years to prepare for a strong domestic currency. They have practically received a grace period, which has now expired.
It looked like a great business idea
The honeymoon period of the Central and Eastern Europeans who have borrowed in CHF is also over. The ones in Germany, who are pointing their fingers now and saying “you have earned it for yourselves”, should stop and think about how the city councils of larger German towns managed to carry out the balancing act to finance more and more community investments without being backed up by the federal government. They should not be too surprised when they realise that foreign currency loans are not an unknown terminology in Germany either.
The low interest rates managed to turn down the sensitivity for risk in so many cases. Austria could be called the hostage in the EUR-CHF conflict on the international foreign currency markets. The commercial banks in the Alpine country felt very clever when they tuned up their business model with a “cheap” loan based on Swiss francs. Institutes such as Erste Bank and Raiffeisen exported the new construction right away to the east – they found fertile ground in Hungary with its hopelessly ever-inflating HUF.
We have already reported several times about the fatal consequences but now a whole new era has begun: the CHF rate is free; however, the foreign exchange borrowers in Hungary are saved, since Prime Minister Viktor Orbán announced in the late autumn of 2014 that the mortgage loans once borrowed in euros, Swiss francs or Japanese yen will be converted to forint. What perfect timing! As if Orbán caught a glimpse of the hidden cards at SNB. (This is not completely ruled out, since in the last months he has gone several times on a secret mission to the Swiss Confederation, mostly by train. He explained that these were private visits, since his oldest daughter is studying in Switzerland.)
Orbán, who is often misunderstood in the West, is now a hero here and there as well. He needed a bit of thinking after the Black Thursday on January 15, before he performed “modestly as a violet” on the state-owned Kossuth Radio (he has a regular slot there on Friday mornings). He did not miss praising his National Bank governor, György Matolcsy, whose MNB did not only save the borrowers through its sophisticated construction, but also backed up the commercial banks with the mandatory exchange of the loans with providing the necessary foreign currencies. In the light of what happened on January 15, these operations look like brilliant chess moves.
Hungary is giving lessons
The MNB is speaking about two percent of the Gross Domestic Product (in absolute numbers around HUF 700 billion or EUR 2.2 billion) – this is the amount of money that the borrowers are saving by the fixing of the conversion rates of 256.60 HUF/CHF or 309 HUF/EUR. In the meantime both EUR and CHF are hovering around HUF 315!
Calculating with that, each borrower with a debt in CHF should be paying HUF 60 more for every franc of his debt. Actually, if we are talking about a car financing or a freely disposable credit on CHF basis, and not a mortgage loan, this amount still has to be paid. According to estimations this concerns more than 100,000 Hungarian families. According to MNB around 500,000 families were saved, who have accumulated a hill of debt of HUF 3,500 billion (around EUR 11 billion) in exchange for their place to live.
In the meantime the Ministry of National Economy is giving lessons for their colleagues in Croatia, Poland and other countries. Even the experts of the European Central Bank want to learn more details about the Hungarian model of credit conversion. The Hungarian laws saving the borrowers in foreign currencies and about the “fair banking sector” are on their way to becoming international bestsellers.