The world's next mortgage crisis?

The euro crisis of 2010 presented Switzerland with a nasty dilemma. The same search for safety that devalued the Polish zloty and Hungarian forint in 2008 now devalued the euro against the franc, sending the cost of doing business in Switzerland soaring. In 2011, the European Union’s statistical agency rated Switzerland’s consumer costs as the continent’s highest. Swiss exporters and service providers were in danger of being priced out of business. Responding to their complaints, the Swiss central bank pegged the franc against the euro in September 2011 at a rate of 1.2 francs to the euro.

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.