Francophiles

By Peter Rudegeair
July 22, 2011

Amid the storm of Europe’s sovereign debt crisis, investors have found a safe harbor in the Swiss franc. Attracted by its low levels of inflation and stable debt-to-GDP ratio, traders have pushed Switzerland’s currency up 15 percent against the euro in 2010 and 6 percent so far this year. This has been a boon to the Swiss government’s ability to finance its operations — Switzerland’s 10-year benchmark bond is currently yielding just 1.53% — as well as Swiss tourists, who are enjoying huge discounts on trips abroad thanks to their favorable exchange rate.

Swiss exporters, though, are not so thrilled with the franc’s rally. Nearly half of the Swiss corporate executives that the central bank surveyed earlier this year admitted they “experienced negative effects” due to the currency’s strength. But it’s the chairman of the Swiss National Bank, a former hedge-fund manager named Philipp Hildebrand, who may be come out as the biggest loser from these events. In an effort to contain the franc’s upward climb early last year, Hildebrand spent 147 billion francs — nearly 25% of the country’s GDP — buying mostly euros, U.S. dollars, and British pounds sterling. The central bank reported a book loss of nearly $21 billion last year as the franc continued its ascent.

Now Hildebrand, like his American counterpart Ben Bernanke, is facing heat at home for his unorthodox monetary maneuvers. Reuters Zurich bureau chief Emma Thomasson wrote an illuminating profile of Hildebrand last month that nicely captured his opponents’ gripes.

“How hard is Hildebrand?” the Weltwoche weekly wrote. “After a meteoric rise, sceptical voices are increasing. Is the man as hard as the currency which he has to direct through the euro crisis?” Christoph Blocher, mastermind of the rightwing Swiss People’s Party said: “What the SNB did was megalomania or incompetence. At the beginning of 2010 they thought they could save the euro from collapse,” he told Reuters. “Nobody can do that, not even the Americans.”

Even central bank insiders have been critical. Former SNB chief economist Ulrich Kohli — who was still at the bank when the first interventions were launched in 2009 — calls Hildebrand’s effort a “total failure and a total waste of money …  It hasn’t done anything to stop the Swiss franc appreciating. It’s really money thrown out the window. I think he was wrong then and wrong now when it comes to the ability central banks have to manipulate the exchange rate.”

If Bernanke had reported the Fed had lost $21 billion speculating in currency markets, you can imagine the outcry from the Tea Party.

Through it all, Hildebrand stands by the SNB’s decision to try to stem the franc’s rise, saying it was a reason the country was able to return to its pre-crisis growth level so quickly.  As he told the bank’s shareholders in April, “The SNB’s policy — and that includes the foreign exchange purchases — undoubtedly contributed to this positive outcome.”

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