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Tuesday
May292012

Bracing for a Euro Crash and Creating A Housing Bubble: The Swiss Caught in a Vice

As developments in the Eurozone veered from bad to awful, with Greece on the brink and Spain getting closer, Switzerland, a speck of land with 7.9 million people surrounded by Eurozone turmoil, has been bracing itself, according to the President of the Swiss National Bank and long-time euro-skeptic Thomas Jordan, for the collapse of the euro.

"We start with the thought that Greece will not exit the Eurozone," he said in an interview in the Sonntagszeitung, and then came the but—actually a whole slew of them.

"Our baseline scenario anticipates a protracted period of great difficulties," he said. "The situation will only calm down when budget cutting and reform efforts start working in the Eurozone, which could be a long time. We're preparing for very turbulent times." And Greece's exit, he said, "can't be excluded”—thus following in the footsteps of Jens Weidmann, President of the German Bundesbank, who’d ventured into a veritable lion’s den with a pungent interview in Le Monde. Read.... The President of the Bundesbank Lashes Out.

And even if Greece remained in the Eurozone, “contagion could spread to other countries and escalate the debt crisis." Less worried about trade and banking relationships with Greece, he saw the greatest dangers in the indirect consequences: “It’s conceivable that the entire European banking system gets into trouble. It would pull down the economy of Europe. Other highly indebted countries could get in trouble as well. That would pose high risks for us."

But there was a flicker of hope, of sorts. "It's possible that Greece's exit has a positive effect on other countries in that the problem would be isolated.” And then the bad news: “But the opposite could also happen, namely a signal to the markets that other countries will follow Greece." And Greece's exit still wouldn't stop the flow of bailout billions because otherwise "Greece may go into free-fall."

In 1993, years before the euro became an actual currency, he wrote in his dissertation that a European monetary union would be very crisis-prone, and that only a few countries would have the strength to stay in it. His "skeptical prognosis" was based on "economic analysis and healthy common sense," he explained—and this, after common sense had long been banished by central bankers and economists.

So, was the euro a mistake?

Um— “My dissertation ... pointed at the problem of imbalances in terms of debt and deficits within the Eurozone. Now we see that the Eurozone hasn't worked as desired for exactly these reasons." And then Jordan added an even darker perspective: "The debt problem doesn't only exist in Europe. The US and Japan also...."

Already last December it filtered out that the Swiss government was preparing for a collapse of the euro. Finance Minister Eveline Widmer-Schlumpf told parliament back then that a task force was studying the imposition of capital controls and negative interest rates to protect Switzerland from the capital flight that a euro collapse would engender. A tidal wave of euros would drive up the Swiss franc, devastate Switzerland’s export economy, and devalue its vast wealth invested in other countries.

Jordan, as member of that task force, confirmed: “We have to be prepared that the monetary union collapses." Specifically, they were working on capital controls and other measures to limit “the influx of capital into Switzerland.” And the details? “I can't go into details," he said.

He lamented that the situation had become “worse and much more uncertain” over the last few weeks: “The euro is at its lowest level against the dollar since January 2010. We're watching the upward pressure on the franc. Investors are looking for a safe haven.”

And a tax haven: the German Ministry of Finance estimated that Germans have up to CHF 360 billion ($374 billion) in Switzerland—110% of GDP! Just Germans. But it’s worldwide phenomenon! Half of it came from institutions and half from private investors, including as much as $100 billion in "black money," a quarter of which may have been transferred by now out of Switzerland "to supposedly safer investment locations" due to the growing risks of being discovered. Capital flight has made Switzerland rich, but now it threatens the real economy.

In August, the SNB had instituted a floor of CHF 1.20 to the EUR and had sworn up and down to defend it by printing unlimited amounts of francs to acquire unlimited amounts of euros, a potential fiasco if the euro were to collapse. Jordan swore once again that the SNB would maintain the minimum exchange rate and that interest rates would “remain at zero for the time being.”

“But there’s a housing bubble,” he said. And and a dangerous conundrum: "In considering the threats facing Switzerland, we concluded that the focus must remain on the minimum exchange rate. As a consequence, interest rates are at zero, and so we have enormously expansionary conditions."

How dangerous?

"It gives me stomach aches. Especially with condos, we have price developments in many regions that are clearly exaggerated. And it looks more and more like a bubble. Mortgages have been growing for years faster than the economy as a whole. That's highly unhealthy. They create imbalances that over time have a negative impact on financial stability and the construction sector.” He cited the US, Spain, and Great Britain. “The dangers are now greater than many want to believe," he said. If the bubble were to continue, Switzerland "would have a home-made crisis in which a lot of capital would be destroyed, and many jobs in finance, construction, and real estate would be in jeopardy."

And this from the guy who in 1993 used economic analysis and healthy common sense to predict the travails of the euro before the euro was even born. Alas, the SNB, hands tied to zero interest rates, is helpless and cannot react to the housing bubble, he said. It can warn but not intervene.

And so, as the Swiss have joined the currency race to the bottom, economies retrench. Populist and nationalist movements sweeping the world threaten ... China, globalization’s biggest winner. Read.... Death Of Globalization Will Shatter China.

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Reader Comments (5)

simple steps for europe is to peg the euro 1 to 1 to the usa dollar, australia and canada should do the same, now it comes down to quality and productivity with in those countrys and it becomes a bigger front against other regions of the world.
remove speculators out of the commodity market to keep inflation low. and europe can enjoy low unemployement and become attractive again as a vacation destination world wide.
simple fact " low unemployment keep a country's financialy healty"
europe does not have to force the euro down , it just has to continue the mess for a while untill the euro hits 1 to 1 and then peg it from falling further, and become the worlds hero for pegging the euro.
ofcourse stopping the over spending by government is a given.
May 29, 2012 | Unregistered Commenterlucas
Lucas - your last line will prove to be the hardest part, and will most likely be impossible, from a political point of view. Deficit spending, as we see in the US, is just too easy.
May 29, 2012 | Registered CommenterWolf Richter
Lucas, I'm a bit worried about you after reading that. You really think its in the best interest of other nations to peg their currency to the USD? Have you not been paying attention at all to the Federal Reserve's long history of money spinning?

Remove speculators? Really? My goodness, have you been reading Lenin? Next you'll be railing against "capitalists" and "hoarders".

"low unemployment keep a country's financialy healthy." Oh come on. Unemployment is *easy* to solve, ask North Korea. It is production, real GDP that is the important thing.
May 30, 2012 | Unregistered Commenterlucas
Hey lucas,, nice to meet a person with a beautiful name,, i wrote in with a little sence of humor,, but lets be honest here,, the western world had a wonderfull time waisting money, beautiful money game for the western banks and nice exporting job game of the large and not so large corporations. and now its time to give some or all of it back and who is and is not going to pay for all of this ponzi game.

but this article is about europe , and we all know if europe pegs everyone else pegs a race to the bottom because the usa does not care about europe and europe does not care about china and china does not care about the usa and azia does not care about ext ext ext , and every country want low unemployment because that revolution is oohhhh so painfull for the rich and political party's

so if you want production and GDP get people to work so they are able to buy goods and yes speculators should take delivery of what they buy paid in cash, just look how enron or who ever it was and some of these dude's screwed california with the utiltiy game, shorting the stockmarket i have no problem with but commodity's just be a real speculator and take delivery , but lets be honest here , the investment banker and banks and financial systems are so interlinked because they wanted it that way so maybe the people of the world should let it all fall apart by removing their money and stop spending , lets all get unemployed and see what happens , because the bankers played the game "lets see how far we can push this and lets see what happens".and governments played the overspending game and lets see what happens .

but to me it sounds all like a good movie can't wait to see matt damon again in a good thriller.
trust me i am not expert but i am not stupid. i have my self far removed from this game financialy.

enjoy reading lucas ,, give me your feetback.
May 31, 2012 | Unregistered Commenterlucas
I doubt that the euro will "collapse", because I think the leaders there recognize that they cannot permit the precedent of letting Greece leave. They also recognize that letting Greece leave solves nothing. Greece will still owe huge debts denominated in euros. They will muddle through with a combination of further bailouts, some banking reforms and token pro-growth reforms and perhaps rather harsh enforcement of most austerities previously agreed to.
June 6, 2012 | Unregistered CommenterDavid

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