miércoles, 13 de mayo de 2015

miércoles, mayo 13, 2015
Financial Instability Of Negative Swiss Interest Rates And A Case For GLD

by FX Analyst

Apr. 28, 2015 12:29 PM ET

Summary
  • Negative interest rates are affecting Swiss pension funds and insurance companies adversely.
  • These institutional investors might be tempted to withdraw their millions of spare cash and keep it in a vault. This would represent a bank run.
  • This might spread from Switzerland to the world and GLD represents a good way to hedge this financial instability concern.
Swiss negative interest rate is starting to have the unintended consequences of encouraging a bank run by institutional clients. The Swiss National Bank (SNB) announced a negative interest rate of -0.75% in January 2015 and it was to encourage greater levels of investment instead of 'cash hoarding'. Well it turns out that the reality is that these institutional investors also have cash/liquidity requirements, and pension funds are one of them. Sufficient cash would be required to meet their monthly payment obligations and other operational purposes.

This negative interest rate is having a real impact on pension funds as reported by the Swissinfo website. Swiss pension fund have a funding gap of $1 Trillion and the negative interest rates are definitely not helping them. As this remains a relatively new phenomenon without precedence, there is no way to account for the impact fully. UBS had calculated that with low interest rates and a weak stock market, money in pension fund for compensation could be depleted by 2024. The calculations are not in for negative interest rates yet but it is likely to worsen the situation.

The National Australia Bank (NAB) provided us with an interesting way to circumvent this problem of shrinking cash balances due to negative interest rates. The NAB suggested that savers would be better off hiding their money under the mattress or in safe deposit box than to put them in banks. This would mean that huge pension funds would be tempted to withdraw all their funds and put them in a reliable safe deposit box until they have the need to withdraw them.

Contagion Risk

If this were to happen in the epicenter of global financial centre like Switzerland, it could mean further issues with financial stability for the whole of Europe. We have seen the bank run in the U.K. with Northern Rock in 2011 during the Great Recession. Depositors were worried about the housing loans in Northern Rock's loan book as negative news rolled out. The U.K. government had to bail out Northern Rock to prevent a second Lehman Brothers' style collapse for the U.K. and the world.

The worries of financial stability would be on a totally different level if this were to occur in Switzerland of all places. Research by Rabobank last year showed that Swiss banks had assets equivalent to 469% of GDP. This shows how leveraged Swiss banks have become and how difficult it would be for the Swiss government or Swiss National Bank to bail them out when institutional depositors decide to abandon the banking system. There will be no lines forming but capital would most definitely flow out at a faster rate than the longest queue in the world.

When you are an institution dealing with billions of funds, it is only natural that you keep a few millions in liquid cash to deal with redemption or withdrawals. At these amounts, it would make sense to withdraw the cash and stash them in safe deposit instead of allowing it to be eroded by negative interest rates. Banks operate on a fractional reserve system and when enough funds were to flee the system, there will not be enough money to meet all redemption.
The IMF had noted that negative interest rates forced insurance companies to take on excessive risk in their 2014 review. They noted that Swiss financial institutions were not immune to financial contagion in the system.


(click to enlarge)

We can see that Swiss banks and insurance company Swiss Re (OTCPK:SSREY) were the most affected by the Global Financial Crisis than the European Sovereign Debt Crisis. This shows the extent of their global linkages. However, it is the European situation that forced the SNB to lower its interest rates to negative. The consequences are not clear yet and there is a possibility that contagion would be a 2-way street.

If major pension funds and insurance companies are to abandon Switzerland, it is clear that Swiss authorities will not be able to bail out. This could spill out of the Swiss border into the global economy. UBS (NYSE:UBS), Credit Suisse (NYSE:CS), Zurich Financial (OTCQX:ZURVY) and Swiss Re are all prominent global financial institutions. If they show signs of collapse, there will be significant consequences for financial stability not only in Switzerland but also the world.

Conclusión

It is not known when that will happen or if the authorities would take pre-emptive steps to prevent it from happening. As individual investors, these are out of our hands. What we can do is to take preventive steps by buying gold. You can either do that by purchasing physical gold or by buying gold ETFs such as SPDR Gold Trust ETF (NYSEARCA:GLD).

(click to enlarge)


As you can see on the chart above, GLD had formed a bottom at around $114. If you are saving for your retirement in Switzerland, you can consider GLD. It's valued in USD and is highly liquid with market capitalization of over $28 billion and transaction volume of more than 7 million daily. Even if you are not in Switzerland, it will be good to keep some form of gold in your investment portfolio.

This would provide you with an alternative source of income if your money is eroded by negative interest rates in your pension account. This might be current situation and it is not that bad compared to the financial instability posed by negative interest rates. It is said that gold is a barbaric relic that does not give you returns but at least it would not shrink in storage.

This will give you an edge in an environment of negative interest rates and even more if inflation were to rise its head.

0 comments:

Publicar un comentario