Currency pegs usually end badly, but that’s because countries typically peg in the face of downward pressure on their currency: a central bank says that one Ruritanian dinar is worth one U.S. dollar, the markets test that claim by selling dinars back in exchange for dollars, and the Ruritanian central bank eventually runs out of dollars and has to give up. But the situation is very different when a central bank is pegging against upward pressure. If the markets think the Swiss franc is worth more than 1.2 to the euro, they’ll keep selling euros to buy Swiss francs. The Swiss central bank, in turn, will never run out of Swiss francs. There seemed every reason to believe that the Swiss franc-euro peg would hold forever—or, at least, for as long as Geneva hotel owners wished to remain in the international conference business.
Then, without warning, Switzerland changed its mind. On January 15, 2015, the Swiss central bank ended the peg—and the franc almost instantly rocketed up 20 percent against the euro, and even more against the currencies of Central and Eastern Europe. Imagine having your mortgage indexed to the price of gasoline during a gas-price spike, and you’ll have some idea of the shock that greeted people like my breakfast companion.
It’s not clear exactly why Switzerland did this. (The most plausible theory is that as the euro declined against the dollar, Americans with money in Swiss accounts began to complain that their investments were being devalued.) Whatever the motive, what matters here are the consequences for Central and Eastern Europe: an even deeper plunge into a mortgage crisis, and further destabilization of already troubled democracies.
Croatia has announced that it will peg its currency, the kuna, to the Swiss franc for a year to protect mortgage holders. It’s a desperate measure, one that could cost Croatia at least 30 percent of its currency reserves as skeptical investors sell kuna to buy francs. Arguably even more dangerously, if the peg to the franc does somehow hold, and if the franc continues to rise against the euro, Croatian goods and services could seem more and more expensive to German, French, and Italian customers. But Croatia’s already unpopular Social Democratic government is terrified, and terrified politicians make reckless decisions. The Romanian parliament is debating a similar move. Poland’s populist Law and Justice party is demanding that the government freeze Polish Swiss-franc mortgages at the January 14 exchange rate, but the government is hesitating to go that far. Instead, it’s trying to negotiate a “pain-sharing” agreement with national banks and threatening them with “social pressure” if they do not comply.
Ominously, one regional government has gained a huge boost of prestige as a result of the crisis: Viktor Orban’s in Hungary. After all its other debt-relief measures failed, Orban’s regime in the fall of 2014 ordered all mortgage lenders in Hungary to convert their Swiss-franc loans into Hungarian forints. This high-handed measure imposed heavy losses on the banks, which Orban shrugged off. Hungary’s banking sector is heavily foreign-owned, and the ultra-nationalist leader has little sympathy for foreign business, especially financial business. Orban’s central bank chief sent a blunt message to the Austrian, Italian, and Belgian banks that dominate the local market: We have too many banks here anyway. Orban explicitly rejects the idea of “liberal democracy,” identifying Russia, Turkey, and China as more successful models for ambitious nations. After the events of January, his example may look more creditable to Europeans in search of escape from seemingly unending financial and economic crisis.