June 1, 2012 / 10:02 AM / 6 years ago

Analysis: Swiss capital curb talk unlikely to become reality

ZURICH (Reuters) - Swiss talk of capital controls to repel investors fleeing the euro zone sounds more like saber-rattling than a realistic plan, given such curbs would be unlikely to work and could cause lasting damage to the country’s banking industry.

A safety construction sign stands outside the Swiss National Bank (SNB) building in Bern April 5, 2012. REUTERS/Pascal Lauener

Swiss National Bank Chairman Thomas Jordan has said a committee is examining measures including capital controls to counter franc buying in the event of Greece leaving the euro but declined to give further details.

SNB Vice Chairman Jean-Pierre Danthine stoked further speculation over the issue on Thursday when he said that negative deposit rates, such as in Sweden in 2009, were not necessarily harmful.

Jordan’s remarks prompted the franc, which the bank capped at 1.2 per euro last September, to weaken on Monday. It dipped again against the euro on Thursday after Danthine spoke. A few days earlier, rumors that the Swiss were planning to impose taxes on bank deposits had a similar effect.

But the cost of such curbs to Swiss banking could well outweigh their limited chance of success in taming the franc.

“It would hurt the Swiss financial industry at a time when it already has other big problems, and damage the credibility and reputation of the Swiss financial centre,” Ulrich Kohli, former SNB chief economist, told Reuters.

Switzerland last imposed capital controls in 1972, when money surged in as the global fixed exchange rate regime broke down. But the curbs failed, and in 1978 the SNB capped the franc versus the German mark. That measure worked.

The SNB set its latest cap after the growing alarm over the euro zone’s weaker sovereign debtors sent the franc soaring some 20 percent in just a few months. Renewed alarm over Greece and Spain has stoked up market pressure on the cap in recent weeks, prompting a brief breach in April.

As investors seek safety ever more urgently, accepting minimal or no returns on German and other highly-rated government bonds, the amount of cash that banks park with the SNB rose markedly last week.

“It’s hard to imagine a concrete measure that would be sensible and at the same time wouldn’t hurt the economy,” said Credit Suisse economist Maxime Botteron. “It’s more of a warning to speculators.”

Although the SNB has said it can handle hundreds of billions of euros in bids per day and is prepared to purchase euros in unlimited amounts, hedge funds are increasing their bets that the SNB will be unable to defend the cap, options data shows.

Kohli, chief economist between 2001 and 2009, said having both a cap and capital controls would be a contradiction.

“You cannot say that you are willing to buy unlimited amounts of euros at 1.20, and then try to stop people from exchanging their euros for Swiss francs,” he said.


In the 1970s, Switzerland tried capital controls first and only capped the currency when they failed. The measures then included forbidding foreign funds from investing in property, banning payment of interest on offshore deposits and requiring Swiss people borrowing abroad to obtain prior authorization.

A similar set of steps could be tried now. Switzerland has a $2 trillion offshore wealth management industry, and an obvious option would be to force banks to charge foreign clients for holding assets in francs.

The left-of-centre Social Democrats (SP) proposed legislation to this effect last year. The franc sold off against the euro as parliamentarians debated the measure, which they ultimately rejected. But the specter of Greece exiting the euro has put the idea back on the table.

“We’ve always wanted the full spectrum of measures to be used. One was negative rates. That could now really happen,” SP politician Susanne Leutenegger-Oberholzer told Reuters.

Another option would be to introduce a transaction tax on securities. Brazil has in recent years used various taxes to discourage hot foreign money inflows.


A big quandary for Switzerland, where every second franc is earned abroad and which relies heavily on both a large financial sector and trade in goods with the euro zone, would be coming up with capital controls that did not wind up choking off the economic growth they were meant to keep alive.

Danthine cautioned last year that some options for fighting a strong franc would be easy to circumvent, while others would have very negative secondary effects.

He cited Sweden’s example - its central bank deposit rate was negative for over a year from mid-2009 - as showing limited use of this tactic was “not inconceivable”. But he also said strongly negative rates could encourage cash hoarding.

Central bankers are also acutely aware that the world’s financial system is far more complicated than it was 40 years ago, making capital controls even harder to implement and easier to evade now than they were then.

Negative interest rates would be futile since most capital inflows go into derivatives, former SNB chief Philipp Hildebrand said last year.

“In the 70s the measures hardly had an effect. Now the volumes are even larger and there’s lots more use of derivatives,” said Botteron at Credit Suisse.

Swiss francs can change hands outside Switzerland, making measures such as requiring buyers of francs to get prior permission from the central bank unworkable. Swiss franc-denominated mortgages, for instance, have become common in Hungary.

A ban on foreigners buying Swiss real estate might help but would not be large enough in scope to shield the currency.

The banking industry, struggling with shrinking profits, stringent new regulation, and global tax disputes, is already screaming: “It won’t work,” said Swiss Bankers Association spokesman Thomas Sutter. “One can have a Swiss franc account abroad, and you can’t forbid banks paying interest on them.”

Disincentives such as negative rates are already failing. Investors have been willing to accept a negative yield in short-dated Swiss federal debt. Yields hit a record low of -0.62 percent at an auction of three-month paper this week.

UBS economist Reto Huenerwadel suggested that stoking fears of capital controls could help more than actually implementing them: “The more they’re talked about, the bigger their impact at an early stage and hence the less likely they become.”

Additional reporting by Andrew Thompson and Anirban Nag; Editing by Emma Thomasson/Ruth Pitchford

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