Currency Costs German States Lose Big on Swiss Franc Bet

Switzerland’s decision to unpeg its currency from the euro has had dramatic consequences for German states and municipalities that invested heavily in Swiss-denominated debt.
Just when you thought Switzerland couldn't get any more expensive.

It sounded like a sure bet: Switzerland’s central bank pledged to keep the Swiss franc stable against the euro, and at the same time interest rates in Switzerland were lower than in Germany. It was a dream for any borrower.

But that dream died on January 15 when Swiss monetary authorities let the franc appreciate freely against Europe’s single currency. Since then, the Swiss franc has jumped about 20 percent against the euro. The old adage proved true again: There is no such thing as a free lunch.

According to Germany’s Federal Statistical Office, public authorities in the country held debt worth a good €21.5 billion in foreign currencies at the end of 2013. The biggest gamblers were Germany’s 16 federal states. They held €19.5 billion in non-euro denominated debt. Analysts from the Landesbank Baden-Württemberg estimate that “a majority” of the foreign currency debt is due in Swiss francs.

In purely mathematical terms, the public debt of Germany has climbed by up to €4 billion.

Currently, a Swiss franc is worth about €1. Until the middle of January the exchange rate was 1.2 franc per euro. In purely mathematical terms, the public debt of Germany has climbed by up to €4 billion because of the unlocking of the franc.

The result: interest and amortization rates will be correspondingly higher.

By far the most affected by the currency appreciation is the state of North Rhine-Westphalia, which has €17.6 billion of debt in foreign currencies. According to the finance ministry, all debt in foreign currencies was completely secured through hedging.

In second place comes the state of Hesse, which has a good half a billion euros in foreign currencies. Berlin, Brandenburg, Saxony-Anhalt, and Baden-Württemberg have several hundred million euros in foreign currencies.

The situation among the municipalities is similar. Far out front are the municipalities in North Rhine-Westphalia, with a billion at risk. Well ahead of the rest are the cities and towns in Hesse, Bavaria and Rhineland-Palatinate. Only the municipalities in the states of Saxony, Thuringia, Mecklenburg-Western Pomerania and Saxony-Anhalt have debt without currency risks.

Since January 15, the Turkish currency fell again against the franc by more than 15 percent.

The Swiss central bank’s move also caught many individual German investors off guard, including Erwin Müller, the founder of the eponymous German drugstore chain. According to information received by Handelsblatt, he made a bet worth millions, but unfortunately on the wrong side. As a spokeswoman for the company group confirmed, he speculated largely against the Swiss franc, and of all things on the Turkish lira.

That went completely wrong. For years, the lira has been falling against the franc. While in 2008 the currencies were almost equal in value, in 2014 a lira was worth not more than half a franc.

In the past, Mr. Müller’s family business had to set aside provisions of more than €200 million to reduce possible losses. It is an impressive sum in comparison with the most recently released annual net profit of about €143 million. In November, the company indicated that it was counting on an appreciation of the lira soon.

Since January 15, that hope has been dashed, because the Turkish currency fell again against the franc by more than 15 percent. The company is remaining mum on what additional losses Müller now has.

There could be worse to come. Because the assets of merchant banks at the Swiss central bank recently increased significantly, experts think that the monetary authorities artificially lowered the franc’s exchange rate immediately after January 15 to prevent an even stronger appreciation. That means that the franc could be worth even more against the euro, lira, etc., in the future.

That would hit homeowners in Eastern Europe especially hard. Many of them have taken out loans in francs. In Poland, Croatia and Romania the governments now want to carve out an agreement with the banks to prevent a collective deterioration of assets.


Axel Schrinner, Sönke Iwersen and Holger Alich are reporters for Handelsblatt. To contact them:, and

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