Italian stalemate pushes up franc against euro

The Swiss franc strengthened sharply against the euro on Tuesday as skittish investors reacted nervously to a political stalemate in Italy following Sunday's elections.

Italian stalemate pushes up franc against euro
Former Italian PM Silvio Berlusconi casts a ballot on Sunday. Photo: Olivier Morin/AFP

Shares on the stock exchange dived in Milan on Tuesday morning and borrowing costs in the country rose over concerns about the ability of the Italian government to function.

In particular, investors appeared to be concerned about the future of an austerity programme launched by the previous government in a bid to reduce Italy’s debt.

The possibility of former prime minister Silvio Berlusconi leading a right-wing coalition is among the scenarios emerging.

However, the strong performance of the Five Star Movement, led by populist Beppe Grillo, is the major reason for uncertainty.

The party, which finished with the third-highest number of seat in the lower house of parliament behind Berluscon's alliance and the centre-left, has said it will not work with other parties.

It holds the balance of power in the Italian senate where no single party has a majority.

Grillo, a former comedian who ran a campaign against the establishment parties, has called for a referendum on Italy’s use of the euro.

The result of the stalemate has been a sell-off of the European common currency and a move into safe havens, including the Swiss franc.

The euro, which rose to 1.25 francs on January 28th fell to just over 1.21 francs in early Tuesday morning trading on foreign exchange markets.

This is close to the 1.20 floor set by the Swiss National Bank, which last year actively intervened in currency market to ensure the franc did not appreciate beyond that level.

A strong franc, valued against the euro, causes problems for Swiss exporters, whose biggest market is the eurozone.

The downward “correction” in the value of the euro “is much more significant than was expected,” Sébastien Galy, analyst from Société Générale told the ATS news agency.
greater than was expected.
Galy said the prospect of an eventual return to power of Berlusconi prompted a “panic sell-off” and weakened the euro against all currencies.

Even though the risk of Berlusconi’s reappearance on the scene was known it was not factored in by traders, he indicated.

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Why is the demand for 1,000-franc banknotes growing in Switzerland?

Large-denomination banknotes, like the 1,000-franc note, are rarely used for everyday transactions in Switzerland. So why are they becoming more popular?

Why is the demand for 1,000-franc banknotes growing in Switzerland?
The kind of banknotes the Swiss like to stash away. Photo by AFP

The demand for 1,000-franc notes has risen in the past months, data from the Swiss National Bank (SNB) indicates.

CHF1,000 converts to approximately €925.75, £824,63 or $US1126.98. 

Whether withdrawing the money from an ATM machine or directly from a bank, customers request large-bill denominations more often than before.

“We do know there is more cash being currently withdrawn in large notes, but it changes hands less often” Sarah Lein, a monetary policy expert from the University of Basel told SRF public broadcaster.

This means the money is not being spent but stashed away.

“We can conclude that some large notes end up in a safe”, she added.

READ MORE: Switzerland’s economy forecast to recover 'from summer onwards' 

The reason, she said, is that many banks charge their customers negative interests on large deposits.

“Therefore, it could be cheaper to simply withdraw the cash in large notes and keep it in a safe, especially since inflation has been extremely low for a long time”, Lein added.

This is not unusual — in times of crisis, more cash is often in demand.

But could this cause the shortage of 1,000-franc bills?

That is not likely to happen, Lein pointed out.

“Both the central and commercial banks have enough cash stored in their vaults to meet such demand. So there is always enough money available”, she said.

There is about 48.6 billion francs floating around in the form of 1,000-franc notes, constituting 59 percent of all Swiss notes in circulation. 

It is the world’s second-largest denomination after Brunei's B$10,000 note.

READ MORE: What do people in Switzerland spend their money on?