After the recent increase in value of the Swiss franc, foreign currencies held by the Swiss National Bank (SNB) will now be worth less in Swiss franc terms. In the case of Euros around 17% less than before. This decline in value will drive a loss. It is not possible to calculate the actual figure, however according to its latest published annual report at 31 December 2013, the SNB had CHF 218 billion of Euro denominated foreign currency investments. At this level the Euro related loss would be a substantial CHF 37 billion. Cantons and their taxpayers hoping to benefit from SNB dividends, have less to celebrate now than when the SNB announced expected 2014 profits of 38 billion on 9 January.
There is however a larger loss that cannot be easily quantified: lost credibility. History shows that when central banks decide to take on the currency markets they typically lose. For example the British pound in 1992 and the Argentinian peso in 2002. Normally central bankers try to defy ‘gravity’, propping up a weak currency only to leave both their currency and their credibility in tatters when they are beaten by the market. The Swiss franc was suffering from overvaluation so the currency is in good shape but the SNB’s credibility is not. It decided to take on the market, made big promises to defend the Euro cap by all means but then failed to deliver on those promises. This is a big loss and not something that can easily be won back.