Switzerland threw the financial world into chaos when last month its central bank lifted the cap on its currency. Some experts say that the repercussions could continue to emerge for weeks, if not months, to come, and investors should be wary. Other experts, more sanguine on the matter, are urging calm, not panic.
Switzerland had maintained the cap on its currency for three years. However, just days after the country’s central bank described the cap as a cornerstone of its economic policy, the Swiss National Bank abruptly lifted the cap. The resulting surge in the currency’s value not only caused many banks and hedge funds deeply enmeshed in currency trades involving the franc to sustain massive losses, but also forced some of the latter to close down, as losses mounted to totals higher than their balance sheets.
The threat posed by the pending announcement by the European Central Bank of a massive QE move of more than a trillion euros was thought to spur the about-face in policy. And markets are still trying to figure out which sectors, in addition to the most obvious, such as luxury and tourism, could be in for the toughest slog.
Fitch Ratings said in analysis of the SNB’s move that “[a] sharp increase in a currency is generally bad news for exporters, which become less competitive. But we believe the impact in Switzerland will largely be felt by unrated small and medium exporters that manufacture domestically and whose costs are therefore predominantly in francs. Fitch-rated corporates such as Nestle, Holcim and Novartis tend to produce locally in the markets where they operate and therefore have a much larger proportion of costs in dollars and euros.”
But those smaller companies could have a tough time, and by extension bring it home—at least in the short term—since more than 40% of Swiss exports end up in the eurozone.
While the SNB’s action is “broadly negative” for Swiss companies, “the impact on Fitch-rated corporates will be limited,” the ratings agency said, since a “large proportion of their costs are overseas and the currencies of their assets and liabilities tend to be well matched.”
Fitch added that “There could be a negative impact on cash flow for companies that report in Swiss francs as the currency move will reduce revenue and to a lesser extent earnings, while dividends will continue to be paid in francs.” Debt coverage ratios for companies that mostly borrow in francs could also be impacted, said Fitch, although larger corporates will likely be hedged because of “match[ing] the currency of their revenue and debt, which limits the impact. Despite the cap on the franc for the last three years, Swiss corporates are used to dealing with significant currency volatility and stood up well to the last big move during the 2011 euro crisis.”