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Josh Zachariah
Josh Zachariah
Articles (89) 

Would Buffett Still Find the Swiss Franc Desirable?

April 01, 2011

A year or two ago Warren Buffett was asked what currency he found most stable, and he mentioned the Swiss franc. Up until this past year the Swiss franc did look like a very desirable currency to hold. The Swiss National Bank, which is the central bank to Switzerland, has grown its balance sheet at rates similar to that of the Federal Reserve. The Federal Reserve grew its balance sheet with mortgage-backed securities and other securitized debt. The Swiss Bank by contrast purchased foreign currencies.

In 2007, the Swiss National Bank held 50 billion (CHF or Swiss Francs) of foreign currencies. By the end of 2010, it had 209 billion. Roughly a quarter of these assets were in U.S. dollars, and over half were in euros.

The reasons for the intervention by the Swiss are bred from the same line of thinking as the Fed—to preserve the economy. The Swiss franc had strengthened against the euro creating deflationary pressures in Switzerland and naturally making Swiss goods relatively expensive in Euro markets. The Swiss Bank purchased a large amount of Euros in an effort to fend off a Franc currency appreciation. Though this may be good news for Swiss exporters, it is surely bad news for people who find value in the Swiss Franc.

Foreign reserves as a percent of the Swiss National Bank assets grew from 39% in 2007 to 77% by 2010. In 2010 the Swiss Bank did hold about 20% of their assets in gold. The Fed values their gold holdings below market value. I’m not sure if that’s also the case with the Swiss Bank, but should that be the case, gold would represent a larger share of the assets. In any event, the quality of assets backing the Swiss Franc has deteriorated precipitously over the last couple years as currencies have made up a larger part.

Thus the notion of hedging against the dollar with the Swiss Franc is somewhat an anomaly, as the Franc is backed by Dollars. The Swiss Bank counts Swiss Francs on the liability side of its balance sheet while its holdings of U.S. dollars and Euros remain on its asset side. A pronounced loss in U.S. dollars would have to be written down on the bank’s equity, which there appears to be none (European accounting practices would need a separate article).

Of further concern is the treatment of the currency holdings. The Swiss National Bank counts “Provisions for Currency Reserves” on its liabilities. However, this account increased only about 5% in the period currency holdings doubled. Though I only scratched the surface, the Swiss Bank and the Swiss franc may be in better condition than I’ve alluded to. But caution should be drawn before assuming the franc will hedge away all your dollar worries.

My earlier piece on the Fed Balance Sheet Josh Zachariah

About the author:

Josh Zachariah
I credit my father and Warren Buffett for molding me into the investor I am today.

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