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.

The Swiss declare war on the Euro

The Swiss are doing what is in their best interest, and they don't mean any harm to Europe, but nonetheless their actions are causing great damage.

Here is what is happening: European investors are nervous about holding euros and don't want to buy dollars, so they buy Swiss francs ("CHF").  This causes the value of the CHF to rise compared to the euro, which makes the Swiss economy uncompetitive (and also hurts people in Hungary and other countries who took out mortgages in francs).  So the SNB reacts by printing more francs and buying euros with them.  So far so good. However, the Swiss are worried about the value of the euro going down, so then they sell the euro and buy other currencies such as the dollar and yen.  This causes the euro to drop even more and the Swiss have to print more francs. The Japanese also react by doing the same thing - printing more yen and buying dollars.

The result is that there is constant selling pressure on the euro and the Swiss don't even benefit, because now they either a) are left holding the bag on a depreciating currency or b) end up monetizing the US debt.

Oy, foiled again!  All hail the almighty US dollar!  Even the Swiss bow down before it.
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Update:
"Switzerland is rapidly turning into a large hedge fund with a small country attached.

At issue is not the SNB's ability to fund - it can - or the near-term benefits, but rather what happens if things go terribly badly in the euro zone. The worse things get the heavier the flows of euros in Swiss coffers will be, and the more disastrous, and pointless, the losses if ever the currency union comes asunder. At that point, or sometime in the run-up, the SNB will blink, as everyone understands they will, and choose to crystallize their losses rather than add to them."
--http://www.reuters.com/article/2012/08/02/column-markets-saft-idUSL2E8J1FCA20120802  

Switzerland - a rogue nation?

Safe deposit boxes in Switzerland are being filled with CHF 1,000 notes.  59% of all Swiss banknotes outstanding are 1000 notes.  These are being used for tax evasion and probably terrorism and drug deals, with the knowledge of the SNB.

Update:  "The U.S. Justice Department called Switzerland's largest private bank a fugitive from justice on Friday after it didn't send any representatives to a court hearing in New York, where it has been charged with conspired with American clients to hide $1.2 billion from the Internal Revenue Service."
--http://hosted.ap.org/dynamic/stories/U/US_SWISS_BANK_IRS

Monetary base exploding in Switzerland

If I am reading this right, the Swiss monetary base was 77 billion CHF at the end of July 2011.  At the end of September, only 2 months later, it was at 253 billion CHF.  The increase in liabilities was mostly in sight deposits, and the increase of assets was mostly in foreign currency investments, probably mostly European government debt, excluding Greece of course.

The primary purpose of this is to weaken the franc to make the Swiss economy more competitive, but it also is a bailout of Europe, which needs all the help it can get.