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THE TTALK QUOTES
On Global Trade & Investment
Published Three Times a Week By
The Global Business Dialogue, Inc.
Washington, DC Tel: 202-463-5074
Email: Comments@gbdinc.org
No. 9 of 2015
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FRIDAY, JANUARY 30, 2015
Filed from Portland, Oregon
Click here for yesterday's TPA quote from Ambassador Froman.
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CURRENCY: A LESSON FROM THE SWISS
Editor's Note: Wikipedia has generously provided the background for today's quote. In their article on Hard Currency, they note that "On September 6, 2011, the Swiss National Bank announced that it would buy an 'unlimited' number of euros to fix an exchange rate at 1.00 EUR = 1.20 CHF, to protect its trade. This action temporarily eliminated the franc's hard currency advantage over the euro but was abandoned in January 2015."
That stunning decision was announced on January 15. The Swiss franc shot up like a rocket, gaining 30 percent in value against the EU in the day following the announcement, then settling back somewhat. The shock of what the Swiss National Bank did on January 15 was still fresh in our mind on January 22 when, over coffee, we asked a colleague what to make of it all. Putting aside all the nail biting and consternation, we asked, Is there a lesson here?
"If you are a trader or a company that has to hold or trade multiple currencies, the lesson is simple:
"Never trust a peg!"
Joanne Thornton
January 22, 2015
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CONTEXT
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In this instance, we outlined the key element of the context ahead of the quote but haven't yet said much about the speaker. Joanne Thornton is a Managing Partner at Policy Connections International, an Adviser to the Global Business Dialogue, and a first-rate researcher with years of experience following trade and currency issues. As she always does, Ms. Thornton backed up her "never-trust-a-peg dictum" with examples, including:
The Mexican Peso Crisis, 1994-95. The implementation of NAFTA in January 1994 was a positive development, but 1994 was a tough year for Mexico, including a currency crisis. That led to a decision by Mexico to abandon the peg with the dollar and ultimately to a large, $50 billion, bail out from the U.S.
The Thai Baht, 1997. In July, Thailand was forced to abandon the baht's peg to the U.S. dollar, allowing the currency to float - and dramatically depreciate. It was the beginning of the infamous Asian Financial crisis.
The Russian Ruble, 1998. Again from Wikipedia: "On 17 August 1998, the Russian government devalued the ruble, defaulted on domestic debt, and declared a moratorium on payment to foreign creditors, and that was after the Central Bank of Russia had spent a small fortune trying to defend the earlier floating peg - effectively a trading band for the dollar-ruble exchange rate."
Brazil, 1999. From a paper on IMF efforts to support Brazil and others in the late 1990s, there is this: "After losing about US $14 Billion of reserves in two days, Brazil moved to a de facto floating exchange rate on January 15." So ended Brazil's crawling peg.
Argentina, 2002. Wikipedia explains: "After much deliberation-[and after years of riots, turmoil, and depression]-in January 2002 [then President Edwardo] Duhalde abandoned the peso-dollar parity that had been in place for ten years."
And Hong Kong, the Exception. We simply note this assessment last week from Aaron Back of The Wall Street Journal, "Hong Kong's peg with the U.S. dollar, for one, remains solid."
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COMMENT
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Yes, the Swiss situation is different. In its recent action, the Swiss National Bank was yielding to upward pressure on the franc. More often, however, when a country abandons a peg, it is because it can no longer sustain it and is resigned to accepting a weaker, often a much weaker, currency.
Your editor once worked for a man who frequently shared the advice, "Never speculate in foreign currencies." No danger. We couldn't afford to-not then, not now, and not even if we could.
More seriously, the business of currency valuation is extremely complex. Yes, exchange rates do affect trade, but we seriously doubt that anyone's trade -- including that of the United States -- would or could be aided by currency language in a trade bill or in the next big trade agreement, presumably TPP. If we are doomed to have such provisions, one can only hope they are reasonably innocuous. And that could prove to be the case. Someone told us not long ago --m we forget who -- that there are those in Japan, a presumed target of such language, who are nevertheless sanguine about including exchange-rate rules in TPP. Their view, reportedly, is, "We can live with anything the Americans can."
It is a tricky area, and doubtless Secretary of the Treasury Jacob Lew will get questions on it when he appears next week before the House Ways and Senate Finance Committees. That should be interesting.
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SOURCES & LINKS
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Editor's Note: Today's featured quote was from a private conversation, and this entry is the only written record of it. The following are also relevant, however:
Swiss U-Turn is a Reuters story on the Swiss decisions from January 15.
Hard Currency is the Wikipedia article we relied upon to set the stage for Ms. Thornton's quote.
Swiss Franc Rockets is a link to a Wall Street Journal article of January 15, 2015, the day of the Swiss National Bank's dramatic announcement.
Mexican Peso Crisis is the Wikipedia article on this 1994 crisis.
The Russian Financial Crisis is the Wikipedia article on this crisis.
Responding to Currency Crises in Emerging Market Economies is an IMF paper (2004) by Shinji Takagi with the quote on Brazil's action in 1999.
Argentine Great Depression, a Wikipedia article, was the source for the quote on President Duhalde's action in Argentina.
Hong Kong Peg Has Legs is Aaron Back's article from The Wall Street Journal of January 23, 2015.
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© 2015 The Global Business Dialogue, Inc.
1140 Connecticut Ave., NW, Suite 950
Washington, DC 20036
Tel: (202) 463-5074
R. K. Morris, Editor
www.gbdinc.org
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