Bracing for a Euro Crash and Creating A Housing Bubble: The Swiss Caught in a Vice

As developments in the Eurozone veered from bad to awful, with Greece on the brink and Spain getting closer, Switzerland, a speck of land with 7.9 million people surrounded by Eurozone turmoil, has been bracing itself, according to the President of the Swiss National Bank and long-time euro-skeptic Thomas Jordan, for the collapse of the euro.

“We start with the thought that Greece will not exit the Eurozone,” he said in an interview in the Sonntagszeitung, and then came the but—actually a whole slew of them.

“Our baseline scenario anticipates a protracted period of great difficulties,” he said. “The situation will only calm down when budget cutting and reform efforts start working in the Eurozone, which could be a long time. We’re preparing for very turbulent times.” And Greece’s exit, he said, “can’t be excluded”—thus following in the footsteps of Jens Weidmann, President of the German Bundesbank, who’d ventured into a veritable lion’s den with a pungent interview in Le Monde.

And even if Greece remained in the Eurozone, “contagion could spread to other countries and escalate the debt crisis.” Less worried about trade and banking relationships with Greece, he saw the greatest dangers in the indirect consequences: “It’s conceivable that the entire European banking system gets into trouble. It would pull down the economy of Europe. Other highly indebted countries could get in trouble as well. That would pose high risks for us.”

But there was a flicker of hope, of sorts. “It’s possible that Greece’s exit has a positive effect on other countries in that the problem would be isolated.” And then the bad news: “But the opposite could also happen, namely a signal to the markets that other countries will follow Greece.” And Greece’s exit still wouldn’t stop the flow of bailout billions because otherwise “Greece may go into free-fall.”

In 1993, years before the euro became an actual currency, he wrote in his dissertation that a European monetary union would be very crisis-prone, and that only a few countries would have the strength to stay in it. His “skeptical prognosis” was based on “economic analysis and healthy common sense,” he explained—and this, after common sense had long been banished by central bankers and economists.

So, was the euro a mistake?

Um— “My dissertation … pointed at the problem of imbalances in terms of debt and deficits within the Eurozone. Now we see that the Eurozone hasn’t worked as desired for exactly these reasons.” And then Jordan added an even darker perspective: “The debt problem doesn’t only exist in Europe. The US and Japan also….”

Already last December it filtered out that the Swiss government was preparing for a collapse of the euro. Finance Minister Eveline Widmer-Schlumpf told parliament back then that a task force was studying the imposition of capital controls and negative interest rates to protect Switzerland from the capital flight that a euro collapse would engender. A tidal wave of euros would drive up the Swiss franc, devastate Switzerland’s export economy, and devalue its vast wealth invested in other countries.

Jordan, as member of that task force, confirmed: “We have to be prepared that the monetary union collapses.” Specifically, they were working on capital controls and other measures to limit “the influx of capital into Switzerland.” And the details? “I can’t go into details,” he said.

He lamented that the situation had become “worse and much more uncertain” over the last few weeks: “The euro is at its lowest level against the dollar since January 2010. We’re watching the upward pressure on the franc. Investors are looking for a safe haven.”

And a tax haven: the German Ministry of Finance estimated that Germans have up to CHF 360 billion ($374 billion) in Switzerland—110% of GDP! Just Germans. But it’s worldwide phenomenon! Half of it came from institutions and half from private investors, including as much as $100 billion in “black money,” a quarter of which may have been transferred by now out of Switzerland “to supposedly safer investment locations” due to the growing risks of being discovered. Capital flight has made Switzerland rich, but now it threatens the real economy.

In August, the SNB had instituted a floor of CHF 1.20 to the EUR and had sworn up and down to defend it by printing unlimited amounts of francs to acquire unlimited amounts of euros, a potential fiasco if the euro were to collapse. Jordan swore once again that the SNB would maintain the minimum exchange rate and that interest rates would “remain at zero for the time being.”

“But there’s a housing bubble,” he said. And and a dangerous conundrum: “In considering the threats facing Switzerland, we concluded that the focus must remain on the minimum exchange rate. As a consequence, interest rates are at zero, and so we have enormously expansionary conditions.”

How dangerous?

“It gives me stomach aches. Especially with condos, we have price developments in many regions that are clearly exaggerated. And it looks more and more like a bubble. Mortgages have been growing for years faster than the economy as a whole. That’s highly unhealthy. They create imbalances that over time have a negative impact on financial stability and the construction sector.” He cited the US, Spain, and Great Britain. “The dangers are now greater than many want to believe,” he said. If the bubble were to continue, Switzerland “would have a home-made crisis in which a lot of capital would be destroyed, and many jobs in finance, construction, and real estate would be in jeopardy.”

And this from the guy who in 1993 used economic analysis and healthy common sense to predict the travails of the euro before the euro was even born. Alas, the SNB, hands tied to zero interest rates, is helpless and cannot react to the housing bubble, he said. It can warn but not intervene.

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