Switzerland's Economy
The 2015 Franc Shock
How the Swiss National Bank suddenly scrapped its cap on the franc in January 2015, causing it to jump 20 percent in minutes, and the lessons about central bank credibility.
In September 2011, the SNB capped the franc at 1.20 per euro, promising to buy unlimited euros to hold it.
Why
The franc had surged during the euro crisis, threatening exporters and causing deflation risks.
The cost
Defending the cap forced the SNB to buy huge amounts of euros, swelling its balance sheet.
The surprise
- On 15 January 2015, the SNB abandoned the cap without warning.
- The franc jumped around 20 percent against the euro within minutes.
Effects
- Currency brokers that had bet on the cap lost heavily; some went bust.
- Swiss exporters faced sudden cost disadvantages.
- Borrowers in Eastern Europe with franc-denominated mortgages saw debts rise.
Why abandon it
The SNB feared unlimited euro buying as the ECB prepared quantitative easing.
Lesson
Central banks can surprise markets, and pegs can end abruptly.
A currency trading firm whose clients bet on the franc staying at 1.20 lost more than its capital within hours of the SNB's announcement.
The SNB abandoned its cap without warning.
- The SNB capped the franc at 1.20 per euro in 2011.
- It scrapped the cap suddenly on 15 January 2015.
- The franc jumped about 20 percent in minutes.
- Brokers, exporters and franc borrowers were hit.
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