Swiss Decoupling Sets The Euro Adrift, Triggers Vast Losses For Banks, And Currency Traders

swiss france

Nobody is shedding any tears over the news that the deciusion by the Swiss central bank to sever the link that kept The Euro single European currency from the Swiss Franc, it is just another example of really important news you will never read of hear of from mainstream media. It is however bad news for all of us.

The decision by the Swiss National Bank to decouple from the euro sent shockwaves through the financial world and triggered billions of dollars worth of losses for banks, currency dealers and hedge funds all over the globe. Citigroup and Deutsche Bank both reported their losses were in the region of 150 million dollars; it is reported that a major hedge fund Everest Capital’s Global Fund had heavily bet against the Swiss franc, and as a result it now has lost “virtually all its money”, in numbers that is $830 million dollars in assets at the end of December. The fund has now been forced to shut down. Several major global currency trading firms have announced that they are now insolvent.

These are only the headline stories we know of so far. The full extent of the financial damage caused by the Swiss National Bank will not be known for months. The same could be said of the slump in oil prices since the middle of last year. These two “black swan events” have caused a domino effect around the world and we can only guess at what the long term outcome may be.

How bad will the brewing financial crisis be? Everyone agrees it will be extremely bad, some say it will be even worse than that. For example, one economics professor at Boston University says that he believes the losses caused by the Swiss National Bank decision will eventually reach into the billions of dollars. And he is on the cautious side …

“The losses will be in the billions — they are still being tallied,” said Mark T. Williams, an executive-in-residence at Boston University specializing in risk management. “They will range from large banks, brokers, hedge funds, mutual funds to currency speculators. There will be ripple effects throughout the financial system.”

Citigroup, the world’s biggest currencies dealer, lost more than $150 million at its trading desks, a person with knowledge of the matter said last week. Deutsche Bank lost $150 million and Barclays less than $100 million, people familiar with the events said, after the Swiss National Bank scrapped a three-year-old policy of capping its currency against the euro and the franc soared as much as 41 percent that day versus the euro. Spokesmen for the three banks declined to comment.

The enormity of the crisis for U.S. currency traders only became clear today (30 January, 2014) when New York-based FXCM, a publicly traded U.S. currency broker, the largest so far to announce it was in financial trouble after beig hit by a 90-percent drop in its share price. FXCM bosses said the firm would need a $200-$300 million bailout to prevent regulators declaring it insolvent.

Currency traders worldwide are allowed to leverage their accounts 100:1, meaning the customer can bet $100 in the currency exchange markets for every $1.00 the customer has on deposit in its account, this can result in huge gains from unexpected currency price fluctuations or massive and devastating losses, should the customer back the wrong currency.

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