Question: Is Stability a Sovereign Asset or Liability?

Ashby Monk

Answer: It depends who you ask.

I don’t think anybody would deny that the United States extracts considerable economic value from its status as a safe haven. The most tangible example of this has to be the US Treasury market, where flows of global financial assets into “safe” US debt artificially discounts the country’s borrowing costs. The US also reaps other ‘economies of safety’, such as having the world’s reserve currency. It seems, then, that the net asset position for the US from being perceived as ‘safe’ and ‘stable’ is positive.

Enter Switzerland: I think we’d all agree that the ‘safe haven’ status is becoming much more of a liability than an asset for this country. The Swiss franc, despite attempts by SNB, continues to strengthen as the world’s financial investors search out currencies that don’t scare the bejesus out of them. For example, on August 9 the franc hit record highs against the Euro, and it also moved 6% against the US dollar in a single day; the most in three decades. The Swiss National Bank has called the franc “massively overvalued“. So why is this bad? Recall that Switzerland’s GDP is made up by roughly half exports. So there could be (will be) negative consequences for the economy from an artificially strong franc. In fact, some are saying that a strong franc may potentially cause a Swiss recession. As one Swiss business manager said: “We have lost about 17% of Emmental exports, which is a lot.” I have to admit, that is a lot of cheese!

In an attempt to stem the currency’s rise and minimize the damage, Switzerland and the SNB are investigating a variety of options. It could start taxing foreign deposits. It could impose capital controls. It could intervene in currency markets. Or it could do some combination of the above. I’ll leave the details of these policies to others to discuss and analyze; there’s enough material in this case study to fill a macro textbook.

But I did want to flag one Swiss policymaker who has taken the position that the strong currency is not necessarily all bad. Bernese Cantonal Minister Andreas Rickenbacher thinks the franc is like a natural resource:

‘Just as other countries have resources, we have also a strength: our currency. The Swiss franc is for us like a commodity. And finally someone says, how to use the raw material and actively exploit francs…The idea of sovereign funds is compelling.”

It’s an interesting idea to set up a Swiss SWF from the currency reserves it will build up if it intervenes in currency markets (see China). But, unfortunately, that would be a medium term policy. In the short run, the Swiss economy needs the franc to stop rising and fast.

Perhaps some US style erratic and bizarre politicking would convince the world that Switzerland, too, is unsafe for investment? Actually, Swiss democracy and its frequent referendums is almost as hard to understand as the American version (and especially the Californian version), so it has that going for it…which is nice.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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