Wild Moves In Swiss Franc As Switzerland Abandons Euro Peg

Today in a surprise announcement, the Swiss National Bank abandoned its silly policy of defending a peg to the euro.

Previously, the bank had set a line in the sand, defending the peg at all costs. That policy meant Swiss accumulation of hundreds-of-billions of euros that today plunged in price.

Wild Swings

Swiss move hits Polish and Hungarian borrowers .

The abrupt move by Switzerland’s central bank to abandon its policy of restraining the franc sparked a financial rout on Thursday in Poland and Hungary, where hundreds of thousands of mortgages are priced in the Swiss currency.

Hungarian borrowers will be shielded from a nearly 25 per cent surge in repayment costs, thanks to a conversion programme introduced by prime minister Viktor Orban in November to protect borrowers from foreign exchange risks.

By contrast, the more than €30bn worth of Polish mortgages tied to the franc enjoy no such protection. Citibank estimated that the various currency moves would increase Poles’ average repayment costs for franc-denominated mortgages by 17 per cent, which could boost the rate of non-performing loans from its current level of about 3 per cent.

This sparked concerns among lenders on Thursday that public anger could ultimately force Warsaw to try to enact a similar measure retroactively.

Swiss franc denominated credit accounts for about 8 per cent of Poland’s total bank assets, but 37 per cent of its total home loans, making it a potential political issue with a general election set to take place in nine months.

Morals of the Story

1. Don't borrow money in other currencies, especially long-term mortgages.
2. Don't expect currency interventions to work forever.
3. Don't believe statements made by central bankers. They are not the economic wizards they are made out to be, and they often lie when it suits their purpose.

Additional Repercussions

This move will shock all of Europe very badly. I doubt it could have come at a worse time. Europe was already heading for a serious recession. This shock wave will make matters worse. And to top it off, the QE coming from the ECB is doomed to fail. It too will make matters worse.

For a discussion of why QE will doom Europe, please consider Steen Jakobsen Warns "Euro is Not a Good Idea and ECB About to Make Biggest Mistake in History"

Gold is up about $25 dollars today, an arguably muted response but certainly in the appropriate direction given all the central bank foolishness that is doomed to fail.

Addendum:

I added point number three. It's an important one: Don't believe statements made by central bankers. They are not the economic wizards they are made out to be, and they often lie when it suits their purpose.

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Today may very well be the start of the "recognition phase" that central banks are not in as much control as widely thought.

Read more at http://globaleconomicanalysis.blogspot.com/2015/01/rabbit-hole-intervention-fails-wild.html#xmlBEK1eSVjE4mIw.99

Written By: Mike (Mish) Shedlock