BERN - The world’s business leaders have gathered at the annual World Economic Forum gathering in Davos, Switzerland. As convinced as ever that they have significant influence on global developments, they will chart the future of the economy and the financial markets.
But the real power lies elsewhere – and not very far away, either, tucked away in an unassuming building on Bern’s Bundesplatz: the Swiss National Bank (SNB).
Few have noticed that over the past several months the bank has grown to be one of the finance world’s biggest players. If it wanted to, the bank could topple Europe’s government bond market overnight or decide which way interest rates in Germany go. The SNB is even a majority shareholder in various companies.
"Switzerland has become one of the world’s largest hedge funds," says Christian Heger, head investment strategist at HSBC Global Asset Management in Germany.
The Swiss government has been moving 350 billion euros around and are making fat profits. The money is from currency reserves that the country has been piling up for the past two years as a result of the Swiss decision in Sept. 2011 to stop the appreciation of the Swiss franc. Overnight the SNB set the rate of 1.20 Swiss francs for 1 euro, and started defending that threshold right away.
That meant that whenever the exchange rate threatened to go below that threshold, the SNB printed money and sold it on the currency market, which meant that plenty of dollars and euros were coming in from the freshly minted francs.
What they intended to do with the money was not clear – it’s not something central bankers are keen to talk about. Then the world found out, indirectly, where some money was going since companies are legally bound to divulge who their shareholders are – particularly so in Finland, where firms have to publish the names of their largest investors on a regular basis.
And so it became known for example that the SNB had invested some 50 million euros in shares of Nokia, the Finnish telecommunications company. It is the company’s fifth largest shareholder and just since the start of 2013 alone it has made an 8% capital gain.
The SNB has also invested in the Kone Corporartion (makers of elevators) and paper producer UPM, holding 0.6% and 0.4% of stocks respectively. Finnish newspaper Helsingin Sanomat calculated that all told the SNB has 330 million euros in Finnish stocks.
In other countries, divulgence laws are less stringent – in Germany for example, the names of shareholders only have to be made public when their holdings cross the 3% threshold. And so far the SNB has not crossed that threshold. It is known that the bank has shares in Germany and other countries since according to its own information some 12% of its currency reserves are invested in them. That amounts to 42 billion euros.
A “passive investor”
However the bank is not saying what stocks they hold, although a bank spokeswoman did say that most of the stocks were quoted on the larger indexes and that the bank’s internal investment guidelines required that the stocks be listed on the MSCI World Index. She added that the SNB did not get involved in company politics, and was only a passive investor.
But this is only possible so long as the amounts invested are relatively low. The bigger they become, the stronger the investor influence by simple virtue of capital redeployment. And that has become the case with government bonds, in which nearly 90% of the SNB’s currency reserves are invested. That amounts to 310 billion euros, more than 260 billion euros of which are in AAA-rated bonds.
Of course there aren’t too many of those left: in Europe, only Germany, Finland, the Netherlands and Luxemburg get the top rating from all the agencies. It is possible that the SNB is also including France and the U.S. since some of the individual agencies still give them the top rating. The bank is not providing any additional information on that score.
Observers estimate that the SNB has at least 100 billion euros in German bonds. The total value of German bonds is 1.2 trillion euros, which means that Germany’s southern neighbor holds over 8%. That can influence rates – in fact it did recently.
Since the euro crisis has let up a little, the pressure on the Swiss franc has too. The exchange rate for the euro has been rising since the beginning of the year, to 1.24 Swiss francs for 1 euro. As a result the SNB doesn’t have to sell any more francs, isn’t taking in any new euros, and doesn’t have to invest them anymore.
"So a major regular German bonds buyer withdraws from the market," says Harald Preissler, chief economist at the Bantleon bond management firm.
As a result, the yields of five-year German bonds have doubled since the beginning of 2013, from 0.3% to 0.6%. That’s still very low. But it shows what happens when the Swiss stop buying. One can’t even imagine what would happen if they started to sell.
That could soon become an attractive alternative. Because just the minimally lower rate for the Swiss franc and stock exchange developments should have increased SNB wealth by around 13.6 billion euros since the beginning of the year. These profits will however only stay on the books for as long as they keep the securities. And as long as the rate for the franc doesn’t get significantly weaker, they will do so in order not to risk upward evaluation.
If the rate should get significantly weaker, however, then the temptation would be big to sell large quantities of euro-based government bonds, other bonds and shares and walk off with the massive profits. That would mean that yields for German bonds could climb drastically and – for example – the interest rates for building capital along with them.
Stock values would fall significantly if such sales took place – Europe-wide, since the SNB has apparently been buying all across the continent.
Europe’s investors can only hope that the Swiss are not only aware of their power but also of their responsibility and act accordingly. On the other hand investors could buy into the SNB since it is an exchange-quoted shareholding company (securities identification number 852243).
The canny Swiss have also built in a restriction so that foreign investors can’t walk away with too many of the profits – a maximum of 6% of profits can be distributed to share holders. The rest goes to the Swiss Confederation.