Switzerland has the dubious distinction of being the most leveraged country in the world. . The ongoing printfest among the world’s central banks has increased the size of its banking sector and forced the SNB to increase its balance sheet to maintain a reasonable exchange rate for the franc.
The Swiss are both major exporters like the Germans and financiers like the British. With the rest of the world devaluing their currencies, the franc naturally rises making Swiss exports more expensive. Furthermore, Switzerland’s safe haven status increases the demand for francs increasing its value.
The two largest Swiss banks, Credit Suisse and Union Bank of Switzerland, have combined balance sheets approaching six times Swiss GDP partially as a result of these flows. These banks are the definition of TBTF, because the Swiss cannot afford to bail them out.
As a result of selling francs and buying foreign currency, the SNB has also become highly leveraged. Its CHF500bn balance sheet is 86% of its GDP. For comparison, these are the sizes of the major world central banks as a percentage of GDP:
The SNB dwarfs all of them at over twice the size of second place Bank of Japan. The franc defense has quadrupled the SNB’s balance sheet since 2009.
This policy is keeping the value of the franc stable, but it is also hurting the PIIGS. The special account with the ECB keeps the Swiss from purchasing too many core country bonds to maintain the spread with the PIIGS. However, the Swiss are keeping the value of the euro too high to help the struggling PIIGS become more competitive on word markets.
So what is really happening here is that the ECB’s loose money efforts are being undone by the Swiss intervention. The policy may be necessary, but the risk is great. A crash in the value of the euro would bankrupt the SNB and destabilize the Swiss financial system.
All of these interventions by the various central banks better keep working. If one intervention fails, they will each fall one by one like dominoes causing the greatest financial panic ever seen.