Swiss central bank accumulates at a record speed cash reserves, which reached in June to 365 billion Swiss francs or $381 billion, due to market intervention to impose an exchange rate of 1.2 francs/euro and at a time when crisis significantly limited investment options.
President of the Swiss National Bank (SNB), Thomas Jordan, seeks options for using francs and currency reserves in safe investments, which have become extremely rare and expensive with the escalating of sovereign debt crisis in the eurozone, according to a Bloomberg analysis.
“SNB has the same problem as many asset management funds. Secure assets have become very expensive. So for now, it prefers cash, and no investments,” comments for Bloomberg Ursin Kublai, an economist at Bank Sarasin in Zurich.
Sovereign debt crisis pushes down yields of the least risky bonds like German government bonds. As a result, the Swiss central bank keeps cash reserves. Institution’s holdings of currency increased by 50% between March and June, to 365 billion francs, the equivalent of over €300 billion or $381 billion. Of the amount added in the four months, 72% are cash deposits to other central banks, the IMF and the Bank for International Settlements (BIS).
SNB introduced in September last year, a maximum of 1.2 francs per euro after the Swiss currency rose strongly against the Euro amid the sovereign debt crisis, some analysts predicting in 2011 that the two currencies will inevitably reach parity. During April-September 2011, the franc has appreciated by 17% against the euro. Since about half of gross domestic product (GDP) comes from Switzerland’s export industry, the country’s economic competitiveness would be seriously affected by uncontrolled appreciation of the currency.
SNB’s currency reserves are equivalent to around 60% of Swiss GDP, according to data at the end of the second quarter of this year. About 60% of the reserves are denominated in euros, from 51% in the first quarter, reflecting market intervention to maintain the exchange rate ceiling.
Prior to the crisis, the Swiss central bank’s holdings of foreign currency were invested mainly in government bonds with triple-A credit rating. After the sovereign debt crisis, only four eurozone countries benefit from triple-A rating from the three major rating agencies, Standard & Poor’s, Moody’s and Fitch. The list of the countries that exited this club include France, Europe’s second largest economy after Standard & Poor’s downgraded the government in Paris in January from “AAA” to “AA+”.
German government bond yield with a 10-year maturity reached on June 1, a minimum of 1.13%, and German securities maturing in two years have had negative interest for the past several months, indicating that investors are willing to pay for parking their property in the safest euro assets. Therefore, while the eurozone crisis limits SNB options in terms of safe assets, the bank’s internal regulations prevent riskier investments.
At the end of the second quarter, government bonds denominated in local currency and deposits with BIS represented 85% of the SNB reserves, and 86% of bond holdings had a triple-A rating.
In order to diversify the portfolio, the Swiss central bank sells euro and buys other currencies, according to data from its balance sheet. However, the U.S. dollar accounted for only 22% of bank reserves at mid-year, compared to 28% in March. Reserves in Japanese yen and Canadian dollars also saw declines in the second quarter, indicating that the bank has slowed down the euro changeover. On the other hand, stocks of Australian dollars, Danish kroner and other currencies increased from 2.9% to 3.5% of the total, and the bank began this year to buy South Korean won.
Analysts at Credit Suisse and Julius Baer, two of the largest Swiss banks, said the central bank would continue to focus on high-rated bonds, limiting investments in currencies, because it doesn’t “necessarily” search for better returns .
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