The Swiss example:
The important thing to note here is that this is yet another example of central bank quantitative easing gone wrong. As the Financial Times notes, when the SNB buys euros, it is essentially undertaking a QE program — that is, it creates francs and swaps them for euros. The end result is balance sheet expansion.
But inadvertently, the SNB has put pressure on the very assets it is purchasing (euros) by using them to purchase core debt. By exacerbating the divide between the eurozone core and the periphery, the SNB made it appear as though periphery bonds were performing worse than they would otherwise have performed, thus signaling funding stress that otherwise would not have existed. This in turn, put pressure on the euro and, concurrently, on the foreign currency reserves (euros) held by the SNB.
From a theoretical and prescriptive perspective, this is further evidence that central banks should avoid intervening in markets via balance sheet expansion as the unintended consequences can outweigh the benefits or, in the SNB’s case, be self-defeating.
And how much have the Swiss put into this?
These currency market interventions have resulted in a dramatic increase in the SNB’s foreign currency holdings — foreign currency reserves now amount to 73% of Switzerland’s GDP with euros accounting for 60% of the total. To put this in perspective, as of the end of August, foreign currency reserves had increased 64% over the course of a year.
Of course the problem with this policy is that it forces the SNB to hold ever increasing amounts of a rather risky asset: euros.
So the Swiss are buying more and more of a currency that their actions are making more risky.