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Switzerland scraps euro rate cap, Swiss franc soars

Geneva, Switzerland– Switzerland scrapped Thursday its three-year bid to hold down the value of its currency in a shock announcement that briefly set off panic in the markets and risks damaging its economy.

Minutes after the Swiss central bank SNB said it was abandoning the minimum rate of 1.20 francs against the euro it strengthened almost 30 percent to 0.8517 against the common European currency before easing back to 1.0421.

9797Fearful that a strong franc could dent earnings as it makes local products more expensive, investors dumped Swiss stocks, and by the end of the day the SMI Index in Zurich had lost 8.7 percent to 8,400.61 points.

The impact was felt as far as in Poland where 700,000 mortgages, or 40 percent of the total, are denominated in the franc. The zloty lost a fifth of its value against the Swiss currency, making it more expensive for Polish homeowners to repay their loans.

Given the panic felt especially in the Swiss market, IG analyst Andreas Ruhlmann said that he expected the Swiss central bank to rapidly shift strategies ”to a new one which will better represent the real market conditions.”

Swiss business leaders called the central bank’s decision a disaster, with banking giant UBS saying it would lead to a drop of five billion francs worth of exports and knock 0.7 percentage points off overall output growth.

”I am at a loss for words,” Swatch group’s boss Nick Hayek told news agency ATS. ”What the SNB has sparked here is a tsunami.”

The Swiss watchmaking giant was among top losers on the stock market, with its shares tumbling 16.4 percent while those of the world’s second largest luxury group Richemont slumped 15.5 percent.

Swissmem, which represents the machine building industry which is Switzerland’s second-largest export generator, warned that if the franc remains strong ”the existence of a many companies will be threatened”.

Veronique Kanel, spokeswoman for the Swiss national tourism agency said ”it is clear the strengthening of the franc will have an impact” on visits as the ski season is in full swing.

”We expect a considerable drop in reservations in the coming days, in particular from Germany and Hollande where the clients are most price sensitive,” she added.

SWISS BOMBSHELL

The SNB had been defending the exchange rate floor since September 2011 in an effort to protect the country’s vital export and tourism industries, even buying massive quantities of foreign currencies to do so.

The rate was introduced as the eurozone crisis sent investors scurrying to the safe haven currency. More recently, the Russian ruble crisis put renewed pressure on the franc.

But the bank, which less than a month ago vowed to enforce the exchange rate floor ”with the utmost determination”, said Thursday it was no longer needed.

”The minimum exchange rate was introduced during a period of exceptional overvaluation of the Swiss franc and an extremely high level of uncertainty on the financial markets,” the bank said.

”While the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate. The economy was able to take advantage of this phase to adjust to the new situation,” the bank added.

Berenberg bank analyst Christian Schulz called the SNB’s announcement a ”Swiss bombshell” while Alpari analyst James Hughes said it would wreck havoc not only on currency markets but also equity markets.

”We suspect that the bank will soon need to intervene against the currency to prevent a further rapid appreciation against the euro,” said Jennifer McKeown, senior European economist at Capital Economics.

To make the franc less attractive, the central bank also announced Thursday it was pushing its interest rate further into negative territory — slashing it by 0.5 percentage points on certain bank deposits to negative 0.75 percent.

Standard & Poor’s said it the SNB’s decision would unlikely have any immediate impact on the country’s top AAA credit rating.

Market players said Bern’s move may have come at this time because it is expecting the European Central Bank to launch a massive quantitative easing programme — which would make defending the franc too costly.

The ECB is meeting on January 22, and is widely seen to launch a controversial programme of large-scale government bond purchase in a bid to keep the bloc from sinking into deflation.

Consumers were stunned by the bank’s decision.

Consumers in Switzerland were rushing to cash in on the sudden windfall, with lines snaking out of currency exchange offices.

”This will save us a bit,” said Charles Gutowski, a 70-year-old wealth management advisor, adding it made vacationing in countries that use the euro more attractive.

In Warsaw, however, the news was greeted with dismay.

”It’s going to be painful,” said Piotr Andrzejewski, who has a mortgage of 120,000 francs. ”My monthly payment will rise between 70 and 95 euros, if the exchange rate stays at today’s levels.”

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