Is the Swiss central bank exacerbating Europe’s debt crisis?

26th September 2012

The effect has caused the North-South yield spread to widen further, fuelling the eurozone's vicious cycle. "We think this 'euro-recycling' is exacerbating the trend of diverging market conditions for sovereign bonds in the eurozone," the report said.

In a statement, however, the SNB disputes Standard & Poor's estimates of the central banks bond purchases:

"The S&P report ‘How the Swiss National Bank Is Driving down Yields for the Eurozone Core' contains a fundamental error. It ignores the sizable increase of SNB deposits with other central banks and international institutions which are published monthly by the SNB. The conclusion by S&P that the Swiss National Bank has bought about 80 billion euros of government bonds of core eurozone countries is unfounded."

The S&P, of course, doubled down on it analysis, saying:

"We stand by the conclusions of our report. Irrespective of the rise in SNB deposits with other central banks (which has risen by significantly less this year than bonds held by the SNB), our analysis and the SNB's own data suggest a very substantial increase in SNB purchases of core Eurozone government debt in recent months. The SNB does not disclose the make-up of its bond holdings, but we believe the assumptions underpinning our analysis are reasonable."

The Business Insider's Bruce Krasting, meanwhile, says the conclusion from the SNB affair is that Central Bank policy in one country has negative consequences to other countries.

"This is an old story. But this time the EU is faced with a big problem with Switzerland. They are going to the mats to save the Euro, and the Swiss are scrambling their eggs. Something has to give.

"The solution is simple. When the SNB gets another E10Bn from Spain or Italy, they have to put the money back into the bond markets of the countries where the money came from. That would address the EU complaints that will be forthcoming. Of course, that would put the SNB in a pickle. I don't think the SNB (or the Swiss people) is willing to buy Spanish sovereign debt. The "Peg" policy would have to come into question under these circumstances. I don't think the Swiss will fund Spain."

Medioritas, a commenter, on Zero Hedge, however, doesn't see the SNB as the bad guy; instead he thinks the central bank is just being pragmatic:

"What we see now (divergent yields) is a good thing. It indicates proper price discovery, with yields reflecting the true state of national management. Should the PIIGS be able to borrow at the same rate as Germany? Hell no, yet this is what the ECB wants and is the ambition of that abomination known as the eurobond…… The Swiss are correctly seeing the system for what it is and are playing safe by sticking with the core."


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