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IMF Says Borrowing in Swiss Francs Must Be Watched

Early this week, the International Monetary Fund issued a report saying that Swiss franc carry trade must be watched closely as abrupt appreciation of the currency due to a sudden unwinding of such trades could hurt economies that heavily borrow in the franc. As Reuters reports, the IMF holds that carry trades, in which investors borrow in low-yielding currencies, such as the Swiss franc, to raise funds for investing in high-yielding currencies, could temporarily weaken the franc to a level below its equilibrium rate.

These developments in carry trades could also imply important spillover risks for other countries, especially in Eastern Europe, where the Swiss franc – by virtue of its low volatility and the low Swiss interest rates – is the currency of choice for loans that are contributing to rapid credit expansion. The report also contains the IMF Directors’ recommendation of close monitoring of such lending to limit related risks.

These are the very risks that the NBS has been warning the citizens about on several occasions, especially those who opt for housing loans indexed to the Swiss franc because of the currently lower interest rates without taking into account the uncertainties of the real costs of such loans over a repayment period of 20 years or more.

According to the IMF, it is not clear whether the franc’s weakness is temporary as strong Swiss fundamentals and narrowing interest rate differentials point to re-appreciation. “Nevertheless, the authorities felt that this effect, and low volatility, could be temporary and that currency appreciation would resume as risk appetites normalized“, says the IMF report.

The Swiss National Bank also warned against the risks of carry trade, saying that a sudden appreciation of the currency could hurt investors betting on a continued weakness of the franc.

Governor`s Office