SNB rallies against “vollgeld initiative” - ING

Swiss citizens are going to vote on 10 June on the introduction of “Vollgeld intiative”, promoting a sovereign money system and according to polls, public opinion is still largely vacillating, but the SNB President insisted on the useless and dangerous nature of the initiative, notes Charlotte de Montpellier, Economist at ING.

Key Quotes

“Long story short, promoters want to withdraw from banks the ability to create money by giving to the Swiss National Bank (SNB) alone the responsibility to create both bank notes and electronic money. The high technicality of the topic gives a hard time to supporters and opponents in explaining the arguments in a simple way to the population. In this context, the SNB which, like the Federal Council and Parliament, is strongly against the initiative, is putting efforts to share some clear argumentation about the possible impact of a “yes” vote.”

“For the SNB, it is a “no”…

Promoters of the initiative believe Switzerland will be able to benefit from seigniorage on scriptural money creation, which is an unused resource in today’s system. These additional resources could then be used to reduce the burden on citizens through ‘debt-free’ payments by the SNB to the Confederation, the cantons or the people. But according to Thomas Jordan, these resources would only replace today’s SNB revenues brought by yield profit on foreign currency purchases, investments, or on banks loans granted. “Under established practice today, the SNB distributes the interest on its capital, while under a sovereign money system it would be selling off the capital” says Jordan. He thus thinks that “‘Debt-free’ payments would not make the country any richer”.”

“The initiative’s authors also believe it would avoid bank runs (which is highly debatable) and “too big to fail” problems as well as prevent the creation of financial bubbles. But Thomas Jordan thinks sovereign money would not help to eliminate the risk of instability. He explained that, “even without recourse to sight deposits, banks can grant loans which are too risky, hold too few provisions for times of crisis and become insolvent if a bubble bursts”. Moreover, a sovereign money system would not eliminate the risk of having banks too reliant on short-term financing from the money market.”

“… For public opinion, it is more a “don’t know yet” mood

Is the initiative going to get enough public support to be enforced? Well, there’s nothing sure for now but we got last week some indications about the result of the popular vote. According to a survey conducted by the Research Institute gfs.bern on behalf of the public broadcaster SSR[1], only 35% of those polled said they would slip a yes in the ballot box on June 10, against 49% who would vote no. The remaining 16% is still undecided.”

“Then, what would happen?

We believe that abstention will be the major winner of the referendum, but that a majority will still reject the proposal. Our baseline scenario considers thus that the monetary system won’t change any time soon.

However, the risk is still worth flagging. Indeed, a “yes” for the reform on the 10th of June would require a complete overhaul of the current monetary system. It would cause insecurity and could harm the financial center and, thus, Switzerland as a whole. It is almost impossible to anticipate the consequences of such an experience on the Swiss economy for now. But in a first instance, it would probably lead to a further weakening of the CHF.”