Switzerland's Old-Money Problem: One Billion in Expiring Francs

One of the world's most coveted currency notes, the Swiss franc, includes a feature that runs at odds with its reputation as a safe store of value: It has an expiration date--and for some notes, that is fast approaching.

Up to one billion francs's worth of 1970s-era bank notes are nearing their cutoff date, when they will unceremoniously make the switch from reserve currency to antique wallpaper as their value is wiped out unless the Swiss government intervenes.

Switzerland is unique among rich countries because its bank notes--from the 10-franc bill all the way to the mighty 1,000-franc bill ($1,025)--lose all of their value 20 years after they are replaced by new ones. Franc coins are always usable.

That two-decade buffer gives people plenty of time to prepare, but the very notion of an expiring currency contradicts the Alpine country's reputation for financial safety and security that has driven the franc's value higher in recent decades.

The government and central bank want the law to change. If it doesn't, then franc notes introduced starting in 1976 will meet this fate in a couple of years. They were withdrawn from circulation in May 2000 to make way for a new series of bank notes that had fresh designs, colors and sizes. That is when the 20-year clock started ticking for people to take them to the Swiss National Bank for new ones.

So starting May 2020, people won't be able to exchange the roughly one billion francs's worth of 70s-era notes that are still out there. They will become worthless relics, the same thing that happened to bills going back to 1907.

It is tough to pinpoint exactly where the one billion in old francs is. Some notes likely vanished naturally, accidentally discarded or lost. Some could be with tourists or workers who left Switzerland with cash and never returned. In recent years, around 30 million to 40 million francs's worth of notes have been exchanged annually. There were still 1.1 billion francs of the 1970s-series notes in 2016.

The central bank doesn't get to pocket the unclaimed money and the Swiss have found an innovative use for it. Under a century-old law, the SNB transfers the equivalent amount worth of obsolete bank notes to a Swiss fund that insures against natural disasters like avalanches. It recently made money available to farmers and wine growers hit by an April freeze.

The Swiss federal council launched a legislative process in August to cancel the expiration of franc bills, so that people will always be able to exchange the 1970s-era notes and subsequent ones. It wouldn't apply to earlier notes. The consultative period lasts until mid-November, then the legislation will move to parliamentary committees.

"The purpose is to avoid that people find themselves with bank notes that have no value," the federal council said in August.

"Switzerland would adapt to the practices of other industrialized countries," that don't have a fixed exchange period, it said.

In the U.S., currency is legal tender no matter when it was issued. The same holds for euros. Though the European Central Bank will stop issuing 500-euro ($593) notes in 2018, they will always keep their value. Germans can still exchange old deutsche marks for euros at the Bundesbank. British pound notes always hold their value, and while the round, 1-pound coins lost their legal status this week, they can still be deposited at many commercial banks.

Despite their limited shelf life, Swiss francs are highly coveted, particularly the 1,000 franc note that is one of the highest denomination pieces of money in the world. The value of Swiss notes in circulation has increased more than 60% since the start of 2010 to 76.5 billion francs, despite the rise of electronic payments and digital currencies.

Of that, 47.3 billion francs are in thousand-franc notes, up more than 70% from 2010.

One drawback of the Swiss plan is that it might make large franc notes even more desirable as a permanent store of value in an era of negative interest rates or to hide money from tax authorities. That could lead to upward pressure on the already strong franc.

"People would purchase even more 1,000 franc notes and keep them in their kitty," if the time limit is lifted, said Jean-Daniel Gerber, president of SGG, which promotes social cohesion in Switzerland, who recently wrote an opinion piece on the debate over old francs.

"The Swiss franc may rise even more and we think it's already overvalued, " he said. And without SNB money, the disaster insurance fund might have to find other revenue sources if there is a natural calamity.

There isn't a breakdown of how much of the 70s-era bank notes are in the big 1,000 franc bills, which are known as "ants" because of the three ants and anthill design on the back. "Paying with an ant" was what the Swiss called using the old 1,000 franc notes.

Unless the law changes, those ants face extinction.

Write to Brian Blackstone at brian.blackstone@wsj.comÇ

(END) Dow Jones Newswires

October 20, 2017 06:48 ET (10:48 GMT)