THE SWISS National Bank set a cap on the relentless rise of the franc in a abrupt move to insulate Switzerland from the expanding sovereign debt crisis in the euro zone.
The move came as European shares dropped to their lowest level since mid-2009 amid mounting doubt about the power of EU leaders to prevent the debt debacle from bringing down Italy or Spain.
Setting a limit on the franc’s value for the first time in decades, the central bank moved to dissuade investors from using the currency as a safe haven as they fret about the debt emergency and the slowdown in the global recovery.
The value of the Swiss currency has risen by about one third since the Lehman bankruptcy three years ago, threatening exports from the country.
“The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development,” the Swiss National Bank said.
Saying it would no longer tolerate an exchange rate below 1.20 francs to the euro and it would defend that target by buying other currencies in unlimited quantities, the central bank warned it might move to an even lower rate against the euro if required.
The move stunned traders, leading to an 8 per cent decline in the value of the franc. By lunchtime in New York, the currency was down 8.6 per cent against the euro at 1.20456 having earlier dropping by almost 10 per cent.
On yet another day of pressure on stock markets, the Italian market lost 2 per cent and the German and French markets lost 1 per cent and 1.1 per cent respectively. Each of these markets suffered heavy selling on Monday.
Senior European officials expressed exasperation at the failure of the Greek government to implement promised reforms after the suspension of talks with the EU-IMF “troika” on the next tranche of rescue loans for the country.
Six weeks have passed since a second bailout for Greece was agreed, but senior officials say the continued failure to implement the terms of first rescue is very ominous.
With the Italian government’s battle to steer a new austerity plan through parliament a further concern, Italian bonds edged higher a day after a sharp sell-off as the ECB continued its debt-buying campaign.
The ECB has warned it will not continue buying bonds indefinitely and has repeatedly sought more decisive political action from European leaders.
European Commission president José Manuel Barroso defended the political will of EU leaders to resolve the euro-zone debt crisis.
“A lot has been done and we are in the process of completing a very complex architecture. I can tell you very honestly I believe there is a strong determination of the leaders of the euro zone and the members states to support the financial stability of the euro zone and the euro,” he added.
Speaking in Australia, Mr Barroso also said there was no plan to establish a European ratings agency. “There is no intention to create any kind of public ratings agency,” he said.
