The ticking timebomb that is Switzerland

"The reserve rose by another CHF 41.4Bn ($43Bn) in July. This follows big increases in May (CHF 59.1Bn) and June (CHF 68.4Bn).

I see the “Peg Policy” as economic warfare by the Swiss against its neighbors. The Swiss are winning this war for the time being, but they are suffering casualties in the process. To maintain the peg, the SNB must increase reserves of Euros. Reserves are now equal to 80% of GDP. Those reserves will rise to well above 100% of GDP before the end of the year.

Someone will put forth the argument that the SNB can continue this indefinitely. All they have to do is print more Francs to satisfy the demands of the market. That’s not correct.

At some point, the SNB will have to give this up. When they do, the Franc will appreciate to parity against the Euro. When that happens, the SNB will lose billions. I believe that the Swiss are already at substantial risk; to continue the peg puts the entire economy in jeopardy."
--http://brucekrasting.com/how-to-lose-friends-and-make-enemies/

Commentary:  There are only two ways out of this:  1) Switzerland joins the Eurozone.  2) Switzerland abandons the euro peg.  If #1 happens, Switzerland would join Germany, Netherlands, Luxembourg and Finland in bailing out the PIIGS.  Somehow, I doubt that they love the Greeks that much that they would continue indefinitely to bail them out.  I could see Switzerland joining the "Northern Euro" someday, but they will not join the Eurozone as it is currently comprised.

That leaves #2.  Well, there is a third option.  If somehow the Eurozone were to stabilize, then the SNB could gradually reverse its holdings.  But that is not going to happen.  So the SNB will abandon the peg.  Since they must, it would be better to happen sooner than later.  But they haven't thought this through.

What will happen when they do abandon the peg and when will it happen?  They will lose hundreds of billions of francs/dollars, an enormous sum for such a little country, that will bankrupt the country.  On top of that, it will be the final straw that kills the euro, because they will need to dump hundreds of billions of euros suddenly.

When will this happen?  Not until there is no other alternative.  As a practical matter, I think there is a built-in cap.  Let's say that it is 1 trillion francs.  It's hard to see how the SNB could have greater foreign reserves than that.  So if the reserves are now at 400 billion, and increasing at the rate of 50 billion per month, the end will come on ... (drum roll) one year from now, about August 1, 2013.

I guess there is a 4th alternative.  That everybody stops using the Euro and uses the Franc instead.  This would work if the Franc were backed by gold.  But it isn't.  So back to number 2.

The eurozone will implode, probably about a year from now.  And the Swiss will cause it.