SNB’s Jordan Says Capital Controls Among Possible Moves

Swiss National Bank President Thomas Jordan
We’re “bracing ourselves for very turbulent times,” said Swiss National Bank President Thomas Jordan. Photographer: Valentin Flauraud/Bloomberg

Swiss National Bank President Thomas Jordan said controls on capital inflows are among measures being considered by a government-led panel to stop the franc from strengthening if the euro-area debt crisis escalates.

“The working group focuses mainly on instruments to combat the franc strength based on a joint approach of the government and the central bank,” Jordan told the SonntagsZeitung newspaper in an interview published yesterday. “We also need to be prepared for the possibility of the currency union collapsing, even though I don’t expect it.” SNB spokesman Walter Meier confirmed Jordan’s remarks to the newspaper.

Any capital controls would follow the SNB’s efforts to stem franc gains by purchasing euros in the 15 months through June 2010. As the euro crisis worsened last year, prompting investors to pile into currency, Swiss policy makers imposed a ceiling of 1.20 versus the euro to protect the economy, using the measure for the first time since the 1970s.

“We could consider such comments as a sign that even the SNB is worried about their ability to maintain the lower bound at 1.20 against the euro in the case of a serious escalation of the crisis,” Peter Kinsella, a senior currency strategist at Commerzbank AG in London, said in an e-mailed note today. “However, this is merely contingency planning.”

Possible Measures

Swiss Finance Minister Eveline Widmer-Schlumpf said in December that a task force is examining options such as capital controls and negative interest rates to curb the franc’s strength if needed. Jordan is part of that panel.

“One measure would be capital controls, or measures that directly influence the inflow of capital into Switzerland,” Jordan said, without elaborating. “We’re identifying these instruments in case more measures are needed.”

The euro region’s fiscal crisis deepened after Greece’s inconclusive elections on May 6 fueled concerns about a breakup of the 17-member area. The single currency dropped to the lowest in almost two years versus the dollar last week. The Swiss National Bank introduced a franc ceiling on Sept. 6 after the franc reached near parity with the euro, hurting exporters and raising deflation threats.

“I certainly see it as a possibility, especially if we get in a situation where we’re seeing a capital flight in Europe,” said Simon Smith, chief economist at FXPro in London in a telephone interview yesterday. “It would be something they wouldn’t want to do, but I can understand why they’re saying it. They don’t want to rule it out.”

‘Upward Pressure’

The Swiss currency traded at 1.2027 versus the euro as of 10:07 a.m. in Zurich and at 95.64 centimes against the dollar.

“The situation over the past few weeks has worsened and has become a lot more uncertain,” Jordan said. “At the same time, we are observing a considerable upward pressure on the franc. Investors are looking for a safe haven. For many, the franc is part of that.”

The SNB doesn’t expect Greece to leave the euro, according to Jordan. The central bank’s “basis scenario sees a longer phase of larger difficulties,” he said. We’re “bracing ourselves for very turbulent times.”

Jordan’s Thesis

Jordan said his university thesis in the early 1990s, which focused on the European currency union being prone to crises with just few countries meeting criteria for full membership, was based on “economic analysis and a healthy common sense,” which led him to this “skeptical forecast.”

The 49 year-old, who took the helm of the SNB last month, said that while the Swiss economy will avoid a recession, he understands “demands for an increase” in the franc ceiling, with many companies in “very difficult” situations.

“Still, we can’t manipulate our currency indiscriminately,” Jordan said. “That would be fatal and counter-productive in an even worse crisis situation. The minimum exchange rate needs to be legitimized. The current minimum exchange rate is realistic.”

The SNB will continue to defend its minimum exchange rate “with the utmost determination even under the most difficult conditions,” he said. Asked whether the central bank is purchasing euros to weaken the franc, Jordan said, “we never give details about our activities in the market.”

The SNB will hold its next monetary assessment on June 14.

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