Forex Flash: Swiss Capital Controls – BBH

Share | (Barcelona) - Marc Chandler, Global Head of Currency Research at Brown Brothers Harriman notes that news that a large Swiss bank will begin charging business clients a negative interest rate for holding Swiss Franc deposits has gotten some observers suggesting that this is a form of capital control.

Usually Capital Controls refer to Sovereign action. In the late 1970s, both Germany and Switzerland did in fact impose negative rates on foreign deposits to discourage speculation in their currencies. However, despite the headlines, Chandler refers away from Switzerland and highlights what he perceives as a REAL capital control story. He writes, "The IMF, the bastion of neo-liberalism is continuing to modify its stance. Recall that in the recent past it has come out in favour of macro prudential policies and has diluted its support for austerity by recognizing the fiscal multiplier is significantly greater than it previously projected, partly as a function of the near-zero interest rate environment."

Today, a staff paper, though written in a personal rather than official capacity, accept the use of direct controls to reduce the volatility of capital flows. It did however, advocate that such controls can be "transparent, targeted and generally temporary." Chandler notes that of course, the IMF has not abandoned its ideology completely and recognises that capital mobility is generally beneficial. However, it acknowledges that hot money flows could destabilise economies in which the capital markets are under-developed.

Chandler picks up on an FT articles which notes that some people are arguing that the IMF should be more critical of the "super-loose monetary policy in rich countries for encouraging volatile flows into emerging markets", without acknowledging that capital flows into emerging markets have actually fallen over the past couple of years, despite the monetary stance of the "rich" (high indebted) countries.

Additionally, Chandler notes that there are a number of factors that drive flows into developing countries and the money policy of the high income countries is one factor, but he doesn´t understand why some like to pretend that it´s mono-causal.

He writes, "Strong growth profiles, high interest rates, strong returns on capital and, of course, under-valued currencies also attract capital flows to some developing countries. Lastly, when Brazilian companies, for example, issue bonds abroad in foreign currencies and/or sell shares abroad and repatriate the funds, the resulting bid for the local currency does not fit into the "currency war" narrative that many seem so enamoured with."

Chandler finishes by stating that in any event, the IMF continues to evolve away from the Washington Consensus and push for capital account liberalisation in all places and at all times. He feels that is a more nuanced stance.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Forex and Currencies

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