Posted by: Dirk | January 22, 2015

The rise of the Swiss Franc – the fall of Osnabrück?

It is well-known that Hungarian households financed their homes via loans in Swiss Francs, which led to big problems when during the crisis the Hungarian forint depreciated against the Swiss Franc. Probably debtors where delighted by the decision of the Swiss National Bank to stop the rise of the CHF, and now have been surprised by a decision to let the exchange rate be determined on the markets again. The FT writes:

Poland and Hungary are not alone in having franc debts. Serbia, Croatia and Romania, among others, are also exposed.

Surprisingly, German cities have committed the same mistake.* The city of Osnabrück reports on its website that under the title The Swiss Franc and the city of Osnabrück that the city saved €1.9 so far because interest rates in Switzerland have been lower than in Germany. However, the recent change in the exchange rate has created a book loss of €7.3 million.

I would suggest to discuss publicly whether it is a good idea that German cities use financial products that have been sold to them by people with far superior knowledge. Is the potential gain from these financial products so huge that all cities need to have CFOs that have invested their time in studying international finance? Is their wage not potentially higher than those gains, and is it possible that on average these financial products amount to zero sum games?

* the idea to save money by paying lower interest rates in foreign currency is called ‘original sin’ in the economics literature and it is well known that countries that borrow foreign currency (like USD) suffer a lot when they finally run out of the them. Usually, the IMF then jumps in and imposes austerity. This is why central banks in Russia, China and elsewhere are piling up USD on their balance sheets.


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