December 2, 2012

Currency War, The European Style?

By Bruce Krasting  
Switzerland is becoming politically isolated in Europe. The country got a big slap in the face from Germany this week. The German Upper House refused to accept a settlement offer from the Swiss government over the very messy matter of German tax cheats, and their accounts with Swiss Banks. A bit of history:  
-  The US Justice Department took on the Swiss over banking secrecy four-years ago. The DOJ used a very big club. The deal was that the Swiss would give up the “Names” of account holders, if they did not, they would have to close up all business in the USA. So the Swiss government, on behalf of their banks, folded like a cheap suit in the rain.  
-  Then all of the countries in the EU wanted a similar deal as the US. They wanted Names, so they could prosecute them at home. The Swiss balked, knowing that if they caved, the domestic private bankers would get crushed, and a good number of high profile folks would get exposed as cheaters.  
-  The Swiss came up with an ingenious “fix” with the following pieces:  
1) A flat tax would be applied to the principal of the Black Accounts. The tax runs as high as 41%, depending on the age of the account.  
2) A withholding tax of 10% would be charged on income the Black Accounts earn.  
3) In exchange for #s 1 and 2, the account holder would remain anonymous, and therefore avoid public disclosure/prosecution.  
This is an incredible deal. Let’s call it what it actually is, State sponsored Money Laundering!  
For a “fee”, that averages less than 20% of the account balance, and an additional ½% a year, money can be successfully laundered. In the end, the money will be as clean as a whistle. Your average drug kingpin would gladly pay that price. 
- Incredibly (to me), both England and Italy jumped on the Swiss offer. They inked deals that start on January 1. The public argument for accepting the deal(s) has been that it raises significant amounts of money. But actually, there are no promises how much will get paid, so the money side is not really the argument for acceptance. I think the reason is that influential folks pushed for this deal because they did not want their Names in the local paper.   
-The German Upper House said “Nein!” this week. It was a tremendous defeat for Eveline Widmer-Schlumpf (Swiss President and Finance Minister – great name). It was also a defeat for Frau Merkel who pushed for it. The worst possible outcome is that now, under German pressure, both Italy and England may be forced to reverse their positions; and chuck out the Swiss tax treaty.  
What happens next? It might be that another Swiss bank employee steals a tape with more names and account information, and sells it for E5m to the German tax collectors (they are willing buyers, they have already bought two tapes). This is highly illegal activity in Switzerland. The country is up in arms over the trouncing of their laws by neighboring France and Germany.  
I wonder if there are any currency implications to this story. The Swiss National Bank has pegged the CHF to the Euro for over a year now. The SNB has been able to do this as they have the tacit approval of the ECB. But the ECB is a slave to French and German politics, and the politicians have their own war with the Swiss. There are very big players squeezing balls right now, I would not be surprised if this ends up blowing back in the face of the SNB.  
In passing, I note that EURCHF hit a low (from early September) of 1.2027 today, just a few pips away from where the SNB steps in. This is happening with the backdrop of a stable to firm EURUSD, so a bit of a surprise. Separately, Tomas Jordon, the boss at the SNB had some interesting words today (Link)
To ensure that the SNB can fulfill its mandate in the long term, without any restriction, in the interests of the country as a whole, particular attention is given to its capital base through a prudent provisioning policy
Read this to mean: We’re gonna take some lumpy losses.  
There is going to be another chapter in this story, soon.
About The Author - Bruce Krasting had worked on Wall Street for 25 years--"For 25 years I woke up thinking, "What am I going to do today to make some money in the market". I don't do that any longer. But I miss it." Nowadays, Bruce blogs about his take on financial events at Bruce Krasting(EconMatters author archive here.)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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