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Tuesday, January 27, 2015 12:24 PM

Swiss Franc Yield Curve Negative for 12 Years; Bond Crash - Austrian Bank Raiffeisen; Another One Bites the Dust

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The casualties continue to pile up in the wake of the Swiss National Bank dropping its peg to the euro.

(See Rabbit Hole Intervention Fails: Wild Moves in Swiss Franc as Switzerland Abandons Euro Peg; Morals of the Story).

The first moral of the story was "Don't borrow money in other currencies, especially long-term mortgages."

The same applies to lenders. And banks that lent money in unhedged Swiss francs to customers in Poland, Hungary or elsewhere now find collection difficult.

Austrian bank Raiffeisen is in deep trouble doing just that.

Austrian Bank Raiffeisen's Bonds Crash

Bloomberg reports Raiffeisen Debt Signaling Distress as Currency Woes Mount

Raiffeisen Bank International AG (RBI)’s junior bonds slumped to levels typically viewed as distressed after gains in the Swiss franc added to woes triggered by the tumble in the Russian and Ukrainian currencies.

Subordinated bonds sold by the Vienna-based lender slid as low as 63.4 cents on the euro, with yields of as much as 10 percent, after trading at 91 cents at the start of December, according to data compiled by Bloomberg.

Investors are concerned because European Union rules forcing losses on junior bondholders before banks can get state aid came into force in Austria on Jan. 1. The government has injected about 8.1 billion euros into three banks in the past six years and guarantees on bonds of stricken Hypo Alpe Adria Bank were revoked to avoid a taxpayer-funded bailout.

Raiffeisen had a total of 4.3 billion euros of Swiss franc loans outstanding as of September 2014, according to estimates by Moody’s Investors Service. The largest part of these are in Poland, where the franc has appreciated 17 percent against the zloty since Jan. 14, threatening to push up defaults on the bank’s 2.9 billion euros of mortgages in the Swiss currency.
Ruble Losses

Interestingly, Raiffeisen is also the third-biggest foreign bank in Russia after Societe Generale SA  and UniCredit SpA.

Losses on the Ruble don't exactly help either to say the least.

Swiss Franc Yield Curve

Privelege of Lending

In Switzerland, you can pay the Swiss government for the privilege of lending to it for any time period up to 12 years.

Swiss 3-month bonds yield -1.30%. Two year bonds yield -1% or so. Amazing.

Chart courtesy of Bloomberg and Saxo Bank economist Steen Jakobsen.

Morals of the Story Recap

  1. Don't borrow (or lend) money in other currencies, especially long-term mortgages.
  2. Don't expect currency interventions to work forever.
  3. Don't believe statements made by central bankers. They are not the economic wizards they are made out to be, and they often lie when it suits their purpose.
  4. It only takes one wrong macro bet with leverage to make a fortune or wipe you out.
  5. When you are speculating with other people's money, especially when you take in a 20% performance fee, there is a huge incentive to make leveraged bets.

Another One Bites the Dust

In honor of all those who were wiped out (or nearly so) in the peg removal, I offer this musical tribute.

Link if video does not play: Queen - Another One Bites the Dust

For further discussion, please see ....

Mike "Mish" Shedlock

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