The Swiss National Bank (SNB) announced Thursday it was removing a 3-year-old cap on the Swiss franc's value against the euro. The value of the Swiss currency immediately soared by 30 percent against the euro, gaining 25 percent against the US dollar.
The move, which has already been dubbed "francogeddon," is bad news for Swiss companies that rely heavily on exports. If the price of Swiss chocolate is subject to a 30 percent hike, in all likelihood, people will buy less of it. Another casualty of the U-turn was the Swiss stock market, which took a 9 percent hit by the end of the day.
To understand what happened, you have to go back to summer 2011, when Europe was in the grips of a massive financial crisis. Since Switzerland is not a member of the European Union, investors flocked to Switzerland to escape the eurozone debt crisis, relying on the Swiss franc as a 'safe-haven' currency.
With the Swiss franc almost hitting parity with the euro — 1 Swiss franc equal to 1 euro — the SNB introduced the ceiling in September 2011, to effectively 'peg' the country's currency to the euro and slow down speculative market trends.
The safeguard worked like this: by enforcing a minimum exchange rate against the euro, the SNB forced down the value of the Swiss franc.
For three years, the Swiss economy was shielded: the price of Swiss-made goods remained stable, and the capped value of the Swiss franc — 1.2 Swiss francs per euro — allowed companies to remain competitive.
On Friday, the two currencies hit parity once more, with Swiss manufacturers will be hit hard by "francogeddon," as exports become pricier.
When it announced its policy in 2011, the SNB had warned that the measure was only temporary and that it would expire on January 15, 2015. Nonetheless, speaking on French radio France Inter this morning, economist Vincent Giret called the move a total surprise.
The Swiss stock exchange closed down nearly six percent Friday, as markets were taken by surprise. Market confidence is at an extreme low, as export prices have shot up by 30 percent, in line with the surge in currency.
Agnès Bénassy-Quéré, an economy professor at the Paris School of Economy (PSE), told VICE News that "the market reacted immediately, because the Swiss franc was in reality undervalued." In other words, the exchange rate, at which it was being maintained by the cap, was too low.
According to Bénassy-Quéré, the SNB miscalculated market reaction. "Since the eurozone is still in the grips of some serious uncertainty," she said, "the Swiss franc is once again a safe-haven currency."
Henri Sterdyniak, an economist at the French Observatory on Economic Conditions (OFCE), explained that the Japanese yen is often subject to the same kind of fluctuation. "Japanese currency appreciates strongly against the dollar," Sterdyniak told VICE News. "and then, over time, the situation returns to normal."
Bénassy-Quéré points out that not everyone loses in the deal, saying "Swiss consumers will benefit from cheaper imported goods, and industries that rely on import and domestic sales will benefit from the hike in the Swiss currency. It really depends what sector you're looking at."
A Swiss source familiar with the matter told VICE News that the decision to ditch the cap hinged on market disparity. In December, the US economy posted its strongest growth in more than a decade, and the Federal Reserve is poised to hike interest rates. Meanwhile, the European Central Bank (ECB) is expected to instate 'quantitative easing' measures to help prevent the euro zone from sliding into deflation. Quantitative easing is a monetary policy, in which a central bank pumps liquidity into the financial system to stimulate the economy.
The source also claimed that, in the current financial picture, the cap is an inadequate measure to fulfill the SNB's primary mission of ensuring price stability for the Swiss.
Sterdyniak considers an exchange rate of 1 euro for 1.15 Swiss franc "feasible" for the Swiss economy. He describes the current parity, however, as "lethal."
Thennouncement will particularly affect countries like Poland and Croatia, Sterdyniak explained, referring to the trend of taking out Swiss franc mortgages. "Polish and Croatian citizens took out Swiss franc loans when the interest rate was low. With the revaluation of the Swiss franc, they're now under financial strain."
But not everyone stands to lose from "francogeddon."
"Swiss consumers will benefit from cheaper imports, and those industries that rely on import and sell domestically will benefit from the surge in the Swiss franc." The move is also a boon for French citizens who live on the border but are salaried in Switzerland.
Image via Flickr.