Switzerland abandons its currency cap: The markets are freaking out.

Why the World Is Freaking Out About Switzerland Today

Why the World Is Freaking Out About Switzerland Today

Moneybox
A blog about business and economics.
Jan. 15 2015 11:55 AM

Why the World Is Freaking Out About Switzerland Today

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That is one Swiss franc, partially covered by a blurry euro note.

Photo by Fabrice Coffrini/AFP/Getty Images

It's a "currency tsunami!" It's #Francogeddon! It's ... a financial-world freakout about Switzerland?

Jordan Weissmann Jordan Weissmann

Jordan Weissmann is Slate’s senior business and economics correspondent.

Yep. Today, Switzerland's central bank shocked investors by abruptly abandoning its national currency cap of 1.20 francs per euro, which it put in place during Europe's rocky economic days of 2011. In the frantic moments afterward, the franc's value rose by almost a third, though it has since retreated a bit. The bank's move had economists throwing around words like "seismic," while the Wall Street Journal described the aftermath as "unprecedented turmoil in the currency market." Swiss stocks also plummeted, experiencing their biggest one-day fall in 26 years, according to Reuters. And of course, rich guys are now worrying about how much it will cost to attend Davos.

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Why on earth did the ever-conflict-averse Swiss decide to unleash havoc on the markets? Well, you have to start with why they adopted the currency cap in the first place. Switzerland's economy is driven heavily by tourism and exports, 40 percent of which are shipped to the eurozone. Therefore, it needs to keep its exchange rate against the euro reasonably low. Otherwise, its valuable watches, machinery, pharmaceuticals, and jewelry would become too expensive abroad, and vacationers would stop showing up to gorge on chocolate. The problem is, when countries sell lots of exports and keep inflation low, like the Swiss, their currency starts to look like an attractive investment option. When the euro crises went into full swing during 2011, panicking money men saw the franc as a safe haven and started buying it en masse, pushing up its exchange rate with the euro, and pushing some exporters into bankruptcy.

Sensing an emergency, the Swiss National Bank declared that it would start buying euros in "unlimited quantities" to keep the franc's value down. Thus, we got the cap.

So what changed? Buying unlimited quantities of euros is about to get expensive. The European Central Bank is about to begin a round of quantitative easing to revive the region's economy—which, for all intents and purposes, means it will be printing lots of euros, which Switzerland would have to purchase in bulk to maintain its exchange rate. That's just not sustainable. So, instead, it's bidding goodbye to the cap, and riding out the nasty economic consequences.

For those who don't follow the movements of the global markets religiously, the basic lesson here is that, just as it can be dangerous when investors collectively decide to dump your currency (see Russia), it can also be problem if they bum rush your banks to buy it.

But anyway, that's why the hashtag #Francogeddon is on Twitter today and has nothing to do with this guy.