They are clearly able to maintain the cap for as long as they choose to. This is because the Swiss central bank has the ability to print Swiss francs. They can always make more, and use them to buy Euros. In fact, the phrase ‘print’ is misleading, as no paper is needed—only electronic money is created.
By this means, the swiss central bank is always able to lower the value of the Swiss franc—it can just carry on printing more until everyone who wants one for the price of 1 Euro 20 cents has one. It is impossible for speculators to buy more Swiss Francs than the bank is able to print.
The strategy seems risk free—if in the future the value of the Swiss franc ever falls against the Euro, they can reverse the process, selling all the Euros they bought earlier with Francs, and buying back their francs at their lower price, and deprinting them. After the deal is fully unwound, they should even have money left over due to the fact that they sold Francs at a higher price than they bought them back.
However, it is not. If the Euro itself were to run into trouble, and become increasingly worthless, the Swiss bank would find that its cap becomes a dead weight—as all the Euros that it bought with printed money become worthless, it will still have lots of outstanding Swiss francs, which will probably be dragged down and become worth much less themselves.
To avoid this problem, they should avoid actually buying Euros. This is done by loudly announcing their strategy of printing Swiss Francs as necessary. Since it’s mathematically impossible for speculators to win by buying more Swiss Francs than the bank can print, hopefully no speculator will try, and then hopefully the bank won’t actually have to buy all that many Euros after all. This should make it much less painful to abandon the cap if the Euro falls to pieces, and the Swiss want the Swiss franc to be worth much more than 1.2 Euros after all.
They are clearly able to maintain the cap for as long as they choose to. This is because the Swiss central bank has the ability to print Swiss francs. They can always make more, and use them to buy Euros. In fact, the phrase ‘print’ is misleading, as no paper is needed—only electronic money is created.
By this means, the swiss central bank is always able to lower the value of the Swiss franc—it can just carry on printing more until everyone who wants one for the price of 1 Euro 20 cents has one. It is impossible for speculators to buy more Swiss Francs than the bank is able to print.
The strategy seems risk free—if in the future the value of the Swiss franc ever falls against the Euro, they can reverse the process, selling all the Euros they bought earlier with Francs, and buying back their francs at their lower price, and deprinting them. After the deal is fully unwound, they should even have money left over due to the fact that they sold Francs at a higher price than they bought them back.
However, it is not. If the Euro itself were to run into trouble, and become increasingly worthless, the Swiss bank would find that its cap becomes a dead weight—as all the Euros that it bought with printed money become worthless, it will still have lots of outstanding Swiss francs, which will probably be dragged down and become worth much less themselves.
To avoid this problem, they should avoid actually buying Euros. This is done by loudly announcing their strategy of printing Swiss Francs as necessary. Since it’s mathematically impossible for speculators to win by buying more Swiss Francs than the bank can print, hopefully no speculator will try, and then hopefully the bank won’t actually have to buy all that many Euros after all. This should make it much less painful to abandon the cap if the Euro falls to pieces, and the Swiss want the Swiss franc to be worth much more than 1.2 Euros after all.
Whoa, a piece of financial advice that I can actually see the reasoning behind.