The Swiss National Bank, a leveraged hedge fund?
ZURICH—Switzerland, for decades a paragon of safety in finance, is engaged in a high-risk strategy to protect its export-driven economy, literally betting the bank in a fight to contain the prices of Swiss products sold abroad.
The nation’s central bank is printing and selling as many Swiss francs as needed to keep its currency from climbing against the euro, wagering an amount approaching Switzerland’s total national output, and, in the process, turning from button-down conservative to the globe’s biggest risk-taker.
Switzerland’s virtue is the root of its problem: broad confidence in the Swiss currency and economy has investors hungry for francs to escape euros, the currency of its shaky European neighbors. Such demand makes francs more expensive and, in turn, drives up the price of Swiss exports.
In the past three years, the Swiss National Bank has printed francs to buy euros and other currencies in a swelling portfolio of foreign assets four times what it was at the beginning of 2010.
Nearly every major central bank is buying nontraditional assets to resurrect domestic economies in the wake of the worst global recession in 75 years. The U.S. Federal Reserve is buying mortgages; the European Central Bank is making unusually long loans to banks; and the Bank of Japan is buying real-estate investment funds.
All risk losing money, but Switzerland’s exposure stands out in character and scale: Its central bank is buying assets from other countries and its holdings of currencies, bonds, stocks and gold—nearly 500 billion Swiss francs, about $541 billion—are nearly the size of the nation’s gross domestic product. In contrast, the Fed’s buying of bonds and mortgages amounts to about 20% of U.S. national output, and the European Central Bank’s holdings stand at 30% of total GDP.