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Hildebrand Put on Losing Side of SNB Franc Fight

SNB Hildebrand in currency tug of war
Swiss central bank president Philipp Hildebrand speaks at a press conference in Zurich. Photographer: Peter Frommenwiler/Bloomberg

Swiss central bank president Philipp Hildebrand is finding himself in a tug of war with currency markets and he may be on the losing side.

Concern that the Greek fiscal crisis will spread through the euro area is pitching the Swiss National Bank against investors, forcing the Zurich-based central bank to sell francs at an unprecedented pace to fight the currency’s appreciation against the euro. With the SNB’s foreign-currency holdings now accounting for 68 percent of its balance sheet, economists say Hildebrand may have to spend even more to maintain the resistance.

“Greece is giving the SNB a major headache,” said David Kohl, deputy chief economist at Julius Baer Holding AG in Frankfurt. “We expect the SNB to continue to lean against the appreciation for as long as possible, but they won’t be able to keep up the pace of currency purchases much longer.”

Hildebrand is already stepping up the fight as the franc strengthened to a record 1.4003 per euro on May 17, 14 months since the SNB began its intervention campaign to insulate Swiss exports and deflect deflation threats. The central bank added 28.5 billion francs ($24.6 billion) to its currency reserves in April, the biggest increase in at least 13 years, as Greece’s turmoil undermined the euro.

The franc has strengthened 5 percent against the currency of the 16-nation region in the last six months.


“Greece has spoilt the central bank’s plans and forced it to change course,” said Alexander Krueger, head of capital- market analysis at Bankhaus Lampe KG in Dusseldorf. “The SNB has reached its limits and if the market wants to see a franc at 1.35 versus the euro, they won’t be able to stop it.”

Hildebrand, 46, has had some success in drawing a line at 1.40 per euro. Two days after the May 17 record, the franc weakened by 2 percent, its biggest one-day gain since March 12, 2009, when the SNB first announced it would buy currencies. It was at 1.4232 against the euro at 10:25 a.m. in Zurich today.

The SNB already had to rethink its game plan at least once. Having kept the franc weaker than 1.50 per euro from March to December 2009, it softened its stance at the end of last year by pledging to counter “excessive” gains rather than “any appreciation.”

On taking office in January, Hildebrand watched the franc appreciate almost 1 percent in his first month, forcing him to keep entering foreign-exchange markets. The SNB retaliated by adding almost 60 billion euros to its reserves in the last three months. Its total holdings are about three times larger than the European Central Bank’s foreign-currency reserves.


“The franc is a safe haven, people are concerned and are looking for security,” said Giovanni Staunovo, a currency analyst at UBS AG in Zurich. “As long as the euro remains under pressure, it’s very difficult to phase out interventions without the franc appreciating even further.”

Erik Nielsen, chief European economist at Goldman Sachs Group Inc. in London, said the April increase in the SNB’s foreign-currency reserves was “stunning.” The purchases also mean policy makers “have exposed themselves to financial risks,” he wrote in an e-mailed note on May 23.

The SNB has already taken a hit. Its first-quarter profit fell 69 percent, due largely to a 2.9 billion-franc loss on its euro holdings.

Half of financial-market analysts surveyed this month by the ZEW Center for European Economic Research forecast that the franc will strengthen against the euro over the coming months. That’s up from 42 percent in April.

Fiscal Success

As euro-area governments struggle to push down their debts, the franc has become a victim of Switzerland’s fiscal success. A policy that aims to balance spending and income over an economic cycle means the Alpine nation may report a budget gap of 1.2 percent of gross domestic product this year, according to government forecasts, compared with the euro region’s projected average shortfall of 6.6 percent.

Euro-area leaders this month unveiled a 750 billion-euro ($930 billion) package to protect the euro and Greece took the first installment of an emergency loan to avoid default. Hildebrand said May 17 the crisis is a “concern” to Switzerland because it isn’t able to “directly influence developments.”


While the franc’s gain has dented the competitiveness of Swiss exports to the euro area, the economy continues to strengthen. Manufacturing growth accelerated in April and leading economic indicators rose to the highest since 2007.

That’s posing a dilemma for the SNB. With oil prices pushing up inflation, the central bank may be forced to phase out interventions as early as next month to pave the way for an increase in its main interest rate from 0.25 percent, Goldman Sachs says.

“In the end the SNB will have to weigh the probability of a safe haven-induced appreciation of the franc against the risks of falling behind the curve,” Goldman Sachs said in a May 14 note. “If the situation in Europe’s periphery calms down, we view the latter as constituting the larger risk and we would expect an end to interventions by the SNB in this case.”

The SNB forecasts the Swiss economy to expand about 1.5 percent this year. By comparison, the ECB sees the euro-region economy growing about 0.8 percent.

Hildebrand and SNB board members Thomas Jordan and Jean-Pierre Danthine will hold their next assessment on June 17.

“The SNB may not be able to stop an appreciation of the franc,” Bankhaus Lampe’s Krueger said. “But compared to the ECB’s problem of a possible state default, it doesn’t seem as bad a situation anymore.”

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