Swiss "real money" fallout would ripple across markets

[LONDON] The Swiss central bank (SNB) has built up a US$750 billion war chest after years of currency interventions but a referendum to limit money creation, if passed, could end such operations and have repercussions far beyond Switzerland's borders.

The Vollgeld initiative, which would strip commercial banks of the power to create new money through lending, is being put to a popular vote this weekend.

Just a third of voters appear to back the plan, but the recent patchy record of opinion polls worldwide has fuelled concerns of a shock result, and unnerved policymakers enough to prompt warnings from the SNB.

The central bank, whose foreign assets range from German government bonds to shares in stock market heavyweights, reckons a 'Yes' outcome would make it harder for it to intervene to hold down its franc currency, which tends to strengthen during times of market stress.

Supporters of Vollgeld - or sovereign money - say it would make the Swiss financial system safer.

Its opponents predict reduced credit access, higher bank charges and weaker growth. If it also removed a key buyer of equities, bonds and currencies, its impact would ripple across foreign markets.

The SNB's efforts to weaken the franc over the past decade have resulted in the world's lowest interest rates at minus 0.75 per cent, and generated 682 billion francs(S$928.1 billion) in net foreign currency purchases and deposits since 2015.

As of end-March 2018, dollars comprised 35 per cent of SNB reserves, while 40 per cent were in euros. A fifth were in stocks, with regulatory filings showing some US$87 billion worth of US equity holdings.

But if the referendum passes such interventions will at least become more complicated. SNB Chairman Thomas Jordan has said forex interventions would be banned under Vollgeld.

"It would change the SNB's toolkit to fight Swiss franc appreciation," said Daniel Vernazza, senior global economist at Unicredit in London.

That's because the current system under which the central bank sells francs in exchange for foreign-currency assets from banks, could be viewed as contravening the Vollgeld stipulation that money issued by the SNB must be "debt free".

Such measures would indeed weaken the currency but with a time lag, Vernazza said, describing it as "a more limited set of tools."

And what if the SNB wanted to tighten policy?

It might need to issue debt to soak up cash from citizens and government. But reclaiming the cash could prove "challenging", predicted Nadia Gharbi, an economist at Pictet Wealth Management in Zurich.

Vollgeld might also spell bad news for the euro zone, given that the SNB's interventionist approach has made it a big buyer of foreign securities.

The looming end of European Central Bank stimulus and the prospect of a mid-2019 rate rise has already started to push up bond yields. At the same time, Italy, the bloc's most indebted country, may be preparing to increase borrowing.

"If the SNB is forced to shrink its balance sheet, the impact will be felt in the European bond markets where it has a major presence in recent years," said Yassir Benjelloun Touimi, a portfolio manager at Dalton Strategic Partnership LLP.

The SNB has bought around 45 billion euros of German bonds since early-2015, according to Vincent Deluard, global macro strategist at U.S.-based broker dealer INTL FCStone .

A detailed breakdown of SNB holdings is unavailable. But 68 per cent of SNB reserves are in government debt and 12 per cent is in "other", presumably corporate, bonds.

On the bright side, SNB interventions and buying of foreign securities have ebbed in recent months as the franc has weakened. Second, Vollgeld would only affect new central bank issuance, not its existing asset stock.

But problems could come if the SNB faced persistent and sharp franc strengthening, possibly even triggered by a referendum 'Yes'.

REUTERS