Switzerland’s surprise decision to let the franc rocket higher has left a trail of carnage from New York to New Zealand, forcing at least two big foreign exchange brokerages into insolvency and wiping billions off the value of the Swiss stock market.
The move has also hammered those who had borrowed heavily in francs at bargain-basement rates, to fund investments in non-Swiss assets. That can be anyone from Wall St. hedge funds to thousands of homeowners in Poland or Russia who have taken mortgages in francs. Even Goldman Sachs was caught out, taking a 16.5% loss on a trade to sell Swiss francs for Swedish kronor, one of its “top trade” recommendations for 2015.
Overnight, two big online retail foreign exchange brokerages, New Zealand-based Excel Markets and Global Brokers, were forced to close due to the losses that their (often highly-leveraged) clients had suffered.
“The majority of clients in a franc position were on the losing side and sustained losses amounting to far greater than their account equity. When a client cannot cover their losses it is passed onto us,” Excel director David Johnson explained.
Excel’s customers, like many around the world, paid the price Thursday for believing the Swiss National Bank’s assurances that it wouldn’t let the franc rise any further than a level of 1.20 to the euro. The franc rose some 15% against both the euro and the dollar after the SNB changed its mind without any warning Thursday.
U.K.-based brokerage Alpari (familiar to many through its sponsorship of London soccer team West Ham United) also said it had been forced into insolvency by the same issues.
Meanwhile in New York, shares forex broker FXCM Inc. (FXCM) were marked down over 80% in pre-market trading as investors braced for the worst. The company said in a statement that it was stuck with $225 million of client losses and “may be in breach of some regulatory capital requirements.”
Dead forex brokerages are likely to be only the first symptom of a new wave of volatility stemming from a move that rocked the world’s financial markets Thursday. While public markets have reacted quickly to price in the damage to Swiss exporters such as Swatch AG (SWGAY) or Nestlé SA (NSRGY), the losses of private investors and unlisted hedge funds will take months to trickle out.
“Swiss franc moves reminds me of some of the more turbulent days in early 1995, Alpari won’t be the last!” tweeted Nick Leeson, whose rogue trades caused the venerable British investment bank Barings to go bust 20 years ago.
But the problem is far from being contained to wheeler-dealers in Wall Street and on the City of London. It’s a massive headache across eastern Europe where (against all common sense and despite the problems caused when this last happened in 2008) borrowers have continued to take mortgages out in Swiss francs–even though they get paid in currencies such as Russian rubles, Polish złoty or Hungarian forints.
The franc has risen 20% against the złoty since the Swiss National Bank made its move, something that will make monthly repayments impossible on billions of dollars’ worth of housing loans.