Counting Ways the Swiss Franc Shook the World

Some folks didn't know when to fold 'em, hurting FXCM.

Less than a month into 2015, we already have a candidate for its biggest economic story for the year. Catching nearly everyone off-guard, the Swiss National Bank (SNB) indicated on Thursday (15 January) that it would no longer push down the value of the Swiss franc against the euro. You see, since 6 September 2011, the SNB had kept the Swiss franc (CHF) at 1.20 to the common currency to maintain the competitiveness of Swiss exports--especially to the Eurozone where over half of them go. The trigger of this guarantee was the CHF brutally gaining against EUR [1, 2] as the European Central Bank (ECB) started emulating American-style easy money policies in trying to reflate the Eurozone from its moribund state.

By the end of Thursday, CHF had gained nearly 40% against the euro--kind of unbelievable, but it really did happen. We all know of the massive Swiss multinationals that have loudly complained about the SNB's action given the loss of competitiveness that will surely follow: ABB in construction, Nestle in food, Hoffman-LaRoche and Novartis in pharmaceuticals, etc. The beating Swiss exporters received on stock markets on Thursday and the uncertainty this action caused for banks that were caught "short" on Swiss francs the world over walloped any number of financial service concerns and dragged global equity indices down.

However, there is also a long list of victims of the SNB move that are somewhat less obvious. Nothing is for certain, and mistaking something temporary--albeit long-lasting--as permanent gives rise to all forms of financial distress when the self-inflicted delusion is revealed. In order of culpability, these include:

(1) Eastern Europeans who took out home loans denominated in CHF:

Eastern European currencies tumbled and banking stocks slumped after Switzerland’s move to allow its currency to appreciate stoked concern individuals will struggle to repay loans denominated in Swiss francs. Poland’s zloty weakened 15 percent to 4.1533 against the the Swiss currency by 5:56 p.m. in Warsaw, paring an earlier loss of as much as 28 percent. Hungary’s forint and the Romanian leu tumbled to records. Warsaw-listed Getin Noble Bank SA sank 16 percent, while Bank Millennium SA and PKO Bank Polski SA, the country’s biggest lender, slid at least 6.5 percent.

The Swiss National Bank’s unexpected decision to scrap its minimum exchange rate is threatening to spur a rise in bad debt as the move raises the cost of paying off loans in francs, including mortgages. Many Poles and Hungarians opted to borrow in francs in the run-up to the 2008 financial crisis because loan rates were lower than for local currencies. Their payments increased as the franc appreciated against the zloty, forint and leu in all but one of the past five years.

“Massive Swiss franc appreciation is extremely bad news for foreign-currency borrowers in central Europe,” Michal Dybula, an economist at BNP Paribas SA in Warsaw, said in an e-mailed note. “It will make servicing franc loans more expensive, reducing disposable income and hurting consumption. That’s bad news for growth and the banking sector as the non-performing ratio of Swiss franc mortgages is likely to increase.”

(2) One of the world's largest online foreign exchange brokers, FXCM:

Retail foreign exchange broker FXCM got a $300 million bailout on Friday after taking huge losses on the Swiss National Bank's (SNB) shock decision to drop its three-year-old peg of 1.20 Swiss francs per euro.

Leucadia National invested $300 million cash in FXCM in exchange for a $300 million senior secured term loan with a two-year term and a 10 percent coupon. If FXCM is sold Leucadia will get a portion of the proceeds. FXCM shares plunged more than 70 percent in afterhours trading Friday. The stock was halted for the entirety of the regular session.

To make a long story short,  FXCM had to cover margin calls for clients considerably in excess of their account equity, causing losses for the broker itself. In other words, it loaned money for clients to gamble against the Swiss franc with, and this magnified their losses when the CHF strengthened. Meanwhile, FXCM held the bag in compensating counterparties for losing bets its customers made against the Swiss franc.

(3) And perhaps the most obvious of them all, a large hedge fund that was reportedly shorting Swiss francs:

Marko Dimitrijevic, the hedge fund manager who survived at least five emerging market debt crises, is closing his largest hedge fund after losing virtually all its money this week when the Swiss National Bank unexpectedly let the franc trade freely against the euro, according to a person familiar with the firm.

Everest Capital’s Global Fund had about $830 million in assets as of the end of December, according to a client report. The Miami-based firm, which specializes in emerging markets, still manages seven funds with about $2.2 billion in assets. The global fund, the firm’s oldest, was betting the Swiss franc would decline, said the person, who asked not to be named because the information is private.

The stereotype most have of the Swiss is of rather staid people. Ever been to Geneva? Whoever thought that it would be the Swiss who would drop this kind of bombshell on the world economy so early in 2015? A happy new year it is not for any number of folks embroiled in forex shenanigans involving the Swiss franc.