Economy

How Switzerland Quietly Turned Into "One Of The World's Largest Hedge Funds"

Awash in cash, the Swiss National Bank has been making major direct investment in the private sector and the bond market. It's a frightening level of financial sway.

The Swiss National Bank in Bern
The Swiss National Bank in Bern
Frank Stocker

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.

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Green

Ecological Angst In India, A Mining Dumpsite As Neighbor

Local villagers in western India have been forced to live with a mining waste site on the edge of town. What happens when you wake up one day and the giant mound of industrial waste has imploded?

The mining dumpsite is situated just outside of the Badi village in the coastal state of Gujarat

Sukanya Shantha

BADI — Last week, when the men and women from the Bharwad community in this small village in western India stepped out for their daily work to herd livestock, they were greeted with a strange sight.

The 20-meter-high small hill that had formed at the open-cast mining dumpsite had suddenly sunk. Unsure of the reason behind the sudden caving-in, they immediately informed other villagers. In no time, word had traveled far, even drawing the attention of environment specialists and activists from outside town.

This mining dumpsite situated less than 500 meters outside of the Badi village in the coastal state of Gujarat has been a matter of serious concern ever since the Gujarat Power Corporation Limited began lignite mining work here in early 2017. The power plant is run by the Power Gujarat State Electricity Corporation Limited, which was previously known as the Bhavnagar Energy Company Ltd.

Vasudev Gohil, a 43-year-old resident of Badi village says that though the dumping site is technically situated outside the village, locals must pass the area on a daily basis.


"We are constantly on tenterhooks and looking for danger signs," he says. Indeed, their state of alert is how the sudden change in the shape of the dumpsite was noticed in the first place.

Can you trust environmental officials?

For someone visiting the place for the first time, the changes may not stand out. "But we have lived all our lives here, we know every little detail of this village. And when a 150-meter-long stretch cave-in by over 25-30 feet, the change can't be overlooked," Gohil adds.

This is not the first time that the dumpsite has worried local residents. Last November, a large part of the flattened part of the dumpsite had developed deep cracks and several flat areas had suddenly got elevated. While the officials had attributed this significant elevation to the high pressure of water in the upper strata of soil in the region, environment experts had pointed to seismic activities. The change is evident even today, nearly a year since it happened.

It could have sunk because of the rain.

After the recent incident, when the villagers raised an alarm and sent a written complaint to the regional Gujarat Pollution Control Board, an official visit to the site was arranged, along with the district administration and the mining department.

The regional pollution board officer Bhavnagar, A.G. Oza, insists the changes "aren't worrisome" and attributes it to the weather.

"The area received heavy rain this time. It is possible that the soil could have sunk in because of the rain," he tells The Wire. The Board, he says, along with the mining department, is now trying to assess if the caving-in had any impact on the ground surface.

"We visited the site as soon as a complaint was made. Samples have already been sent to the laboratory and we will have a clear idea only once the reports are made available," Oza adds.

Women from the Surkha village have to travel several kilometers to find potable water

Sukanya Shantha/The Wire

A questionable claim

That the dumpsite had sunk in was noticeable for at least three days between October 1 and 3, but Rohit Prajapati of an environmental watchdog group Paryavaran Suraksha Samiti, noted that it was not the first time.

"This is the third time in four years that something so strange is happening. It is a disaster in the making and the authorities ought to examine the root cause of the problem," Prajapati says, adding that the department has repeatedly failed to properly address the issue.

He also contests the GPCB's claim that excess rain could lead to something so drastic. "Then why was similar impact not seen on other dumping sites in the region? One cannot arrive at conclusions for geological changes without a deeper study of them," he says. "It can have deadly implications."

Living in pollution

The villagers have also accused the GPCB of overlooking their complaint of water pollution which has rendered a large part of the land, most importantly, the gauchar or grazing land, useless.

"In the absence of a wall or a barrier, the pollutant has freely mixed with the water bodies here and has slowly started polluting both our soil and water," complains 23- year-old Nikul Kantharia.

He says ever since the mining project took off in the region, he, like most other villagers has been forced to take his livestock farther away to graze. "Nothing grows on the grazing land anymore and the grass closer to the dumpsite makes our cattle ill," Kantharia claims.

The mining work should have been stopped long ago

Prajapati and Bharat Jambucha, a well-known environmental activist and proponent of organic farming from the region, both point to blatant violations of environmental laws in the execution of mining work, with at least 12 violations cited by local officials. "But nothing happened after that. Mining work has continued without any hassles," Jambucha says. Among some glaring violations include the absence of a boundary wall around the dumping site and proper disposal of mining effluents.

The mining work has also continued without a most basic requirement – effluent treatment plant and sewage treatment plant at the mining site, Prajapati points out. "The mining work should have been stopped long ago. And the company should have been levied a heavy fine. But no such thing happened," he adds.

In some villages, the groundwater level has depleted over the past few years and villagers attribute it to the mining project. Women from Surkha village travel several kilometers outside for potable water. "This is new. Until five years ago, we had some water in the village and did not have to lug water every day," says Shilaben Kantharia.

The mine has affected the landscape around the villages

Sukanya Shantha/The Wire

Resisting lignite mining

The lignite mining project has a long history of resistance. Agricultural land, along with grazing land were acquired from the cluster of 12 adjoining villages in the coastal Ghogha taluka between 1994 and 1997. The locals estimate that villagers here lost anything between 40-100% of their land to the project. "We were paid a standard Rs 40,000 per bigha," Narendra, a local photographer, says.

The money, Narendra says, felt decent in 1994 but for those who had been dependent on this land, the years to come proved very challenging. "Several villagers have now taken a small patch of land in the neighboring villages on lease and are cultivating cotton and groundnut there," Narendra says.

They were dependent on others' land for work.

Bharat Jambucha says things get further complicated for the communities which were historically landless. "Most families belonging to the Dalit or other marginalized populations in the region never owned any land. They were dependent on others' land for work. Once villagers lost their land to the project, the landless were pushed out of the village," he adds. His organization, Prakrutik Kheti Juth, has been at the forefront, fighting for the rights of the villages affected in the lignite mining project.

In 2017, when the mining project finally took off, villagers from across 12 villages protested. The demonstration was disrupted after police used force and beat many protesters. More than 350 of them were booked for rioting.

The villagers, however, did not give up. Protests and hunger strikes have continued from time to time. A few villagers even sent a letter to the President of India threatening that they would commit suicide if the government did not return their land.

"We let them have our land for over 20 years," says Gohil.

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