Word on the web: Swiss franc fallout

Last week, the Swiss National Bank stunned global markets when it scrapped its ceiling against the euro. We assess the reactions

Lessons to be learned If you were to ask The New York Times' columnist Paul Krugman what he thinks of the national bank's decision to scrap its cap of SFr1.20 to the euro, he would tell you that it's a big mistake. 

But he would also point out that the fate of Switzerland "isn't the important issue" here. "What's important, instead, is the demonstration of just how hard it is to fight the deflationary forces that are now afflicting much of the world - not just Europe and Japan, but quite possibly China too," Krugman explains. Even America isn't immune, he adds. 

For Krugman, the Swiss slip serves as a warning to other nations. It shows that if you fall into the deflation ditch, it's extremely hard to get out. "This is one reason that slashing government spending in a depressed economy is such a bad idea," he explains. "It's not just the immediate cost in lost jobs, but the increased risk of getting caught in a deflationary trap."

The New York Times opinion

Shortfalls and gains However, Alex Brummer, City Editor of the Daily Mail, takes a more balanced view. While trade will inevitably suffer as a result of abolishing the cap, macro hedge funds could make billions, he argues. 

"The really big shock to the system will be in the trading rooms of the banks and brokers," Brummer acknowledges. "The effective revaluation of the Swiss franc, referred to as 'Francogeddon' by the markets, is major. Even with the best hedging-insurance contracts in place, dealers are going to be caught with losses."

But while an event of this magnitude can lead to shortfalls in the billions, it can also create gains of a similar value, he adds. "Macro hedge funds, which make big bets on economic trends, potentially could be the biggest winners, as was the case with George Soros in 1992 when he bet against the pound, making billions."

This is Money comment

Profiting property CityAM.com's Emma Haslett notes some other beneficiaries. The London Central Portfolio (LCP), a residential fund and asset manager, received an increased number of enquiries from Swiss-based investors looking to move their money into London real estate, she reveals. 

Central London residential property is seen as a "notoriously dependable investment", Haslett explains. It has been dubbed a "safe haven" for foreign investors looking for somewhere reliable to put their cash, particularly following recent volatility in the Russian ruble, she adds.  

Speaking to CityAM.com, Tim Kemp, Chief Executive of Kemp Private Finance, also noticed more interest from Swiss clients. "Overnight, central London has become a much more attractive investment for my Swiss clients. I have already received numerous calls this morning from investors wanting to agree finance quickly to move their money out of Switzerland," he said.

CityAM.com story

Seen a blog, news story or discussion online that you think might interest CISI members? Email lawrence.cohen@wardour.co.uk 
Published: 23 Jan 2015
  • News
  • Word on the web
  • Europe
  • economic confidence

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