Fresh flight to Swiss franc as Europe’s bond strains return
The Swiss franc has surged to an all-time high against the euro on capital flight from the eurozone after Irish, Greek, and Portuguese bonds came under renewed fire.
By Ambrose Evans-Pritchard
Yields on 10-year Swiss bonds fell to 1.02pc as investors flocked into the ultimate safe-haven asset, now outperforming gold.
No country in the developed world apart form Japan has ever seen 10-year yields drop below 1pc. Rates remained significantly higher during the two great depressions of the 1870s and the 1930s.
Within the eurozone investors turned to German Bunds, pushing yields to an historical low of 2.11pc. The search for safety seems driven by swirling mix of fears over a double-dip recession in the US, austerity overkill across the West, and sovereign debt worries on the eurozone periphery.
The Swiss National Bank appears to have abandoned efforts to halt the appreciation of the `Swissie’ after losing 14bn francs (£9bn) over the first half of the year in a failed effort to stop money flooding into the country, some of it coming from German citizens in Bavaria opening precautionary accounts.
The franc punched through €1.30 on news that Standard & Poor’s had downgraded Ireland to AA-. The rating agency cited concerns that the bank rescue costs may ultimately balloon to €50bn, against government estimates of nearer €25bn. S&P said the public debt would rise to 113pc of GDP if the bail-out fund is included on budget books.
Effects of the downgrade ricocheted through the bonds markets of weaker economies. Spreads on Greek bonds rose 40 basis points to 927, higher than before the EU’s €110bn rescue.
Hans Redeker, currency chief at BNP Paribas, said flows into Swiss franc have been early warning signal at each stage of Europe’s debt crisis and should be watched closely. “We may be seeing a rerun of what happened in May,” he said.
Phil Jordan from Monument Securites said that even Britain was emerging as a sanctuary as yields fall to a fresh low of 2.84pc, though in this case the money is rotating away from the US. “Clients are selling US Treasuries to buy Gilts. The US economic data has been so bad investors are looking for other safe havens,” he said.
Morgan Stanley said investors are taking a risk buying sovereign bonds at this level, arguing that debt-to-GDP ratios in the developed world greatly understate the true liabilities and aging costs that threat public finances. “It’s not whether governments will default, but how, and vis-a-vis whom,” said Arnaud Mares in a client report.
There have been plenty of episodes in history where governments use “financial repression” to wriggle out of debts, including Franklin Roosevelt’s revocation of gold clauses in US bond contracts in 1934, and Chancellor Hugh Dalton’s perpetual debt issue at an artificially-low 2.5pc in 1946.
As a rule of thumb, countries with a high stock debt opt for stealth inflation, while those facing a financing crunch rewrite the contracts.
Mr Mares said most Western states are in “deep negative equity” and cannot hope to pay their debts. Bondholders have so far been “fully sheltered from loss” through the crisis but this is politically untenable. The rest of society will not suffer austerity for ever to pay the coupons.
The next phase of the crisis will see revenge by all those who have already taken a big hit, or expect to do so: whether under water on their mortgages, unemployed, dependent on health support, or state employees. Democracy will have its way.