Swiss Franc Replaces Banks As Main Economic Concern

By Matthew Allen

The Swiss economy performed a steady if unspectacular recovery in 2010, but now faces an uncertain 12 months ahead in the face of a continued European debt crisis.

While regulators and the government were busy restoring stability to the financial sector, the economic woes of European neighbours sent the franc spiralling through the roof to the detriment of Swiss exporters.

There was a distinct lack of champagne bottles being uncorked during the festive season last year, but the financial sector was still left with a major hangover at the start of 2010.

A government deal between Switzerland and the United States to release the details of thousands of UBS account holders was challenged in the Swiss courts in January, while parliament had yet to rubber stamp the controversial plan.

To make matters worse, stolen Swiss bank data was being bought by European governments despite Switzerland agreeing to renegotiate double taxation agreements.

But parliament agreed to the UBS deal in the summer. And the autumn saw Germany and Britain agree in principle to deals that could preserve Swiss banking secrecy and solve the thorny issue of tax evaders hiding money in Switzerland.

Troublesome franc

By this time, the heat on Switzerland had cooled considerably as powerful countries found they had other problems to address.

Regulators were also working hard to strengthen the foundations of Swiss banks. Following the lead of international counterparts, the Financial Market Supervisory Authority (Finma) added a “Swiss finish” to revised global standards to compel domestic banks to hedge risks even more stringently than international competitors.

It remains to be seen what measures are adopted by the international financial community and what effect they have on the landscape. But there were encouraging signs that Swiss banks were starting to return to health during 2010.

UBS, Europe’s worst hit bank from the subprime financial meltdown, recorded a profit in the final quarter of 2009. The trend was continued for the first nine months of 2010 and the bank has also managed to stem the tide of assets withdrawn from its wealth management business.

The Swiss National Bank (SNB) was also working in overdrive in the first half of the year trying to hold back the seemingly inexorable rise of the franc against first the euro and later the dollar.

Exporters worry

The SNB had received much praise at the end of 2009 for keeping the franc at above SFr1.50 against the euro by buying up vast chunks of the European currency.

But those cheers have steadily turned into jeers as the franc continued to rise despite continued SNB intervention that had cost it more than SFr21 billion ($22 billion) in the first nine months of the year.

The Swiss central bank’s actions proved futile in the face of first Greece (in May) and then Ireland (in November) requiring huge European Union bailouts. Fears that Portugal and other countries may also need emergency funding in the near future have further weighed on the euro.

In the meantime, the dollar fell below the value of the franc as the United States economy failed to recover as quickly as anticipated, forcing the US government to print more money.

Despite Swiss exporters making up ground on a dismal 2009 in the first half of this year, the outlook for 2011 looks bleaker. Orders have already dropped for many manufacturers with two-thirds of Swiss exports being consumed by Europe and another fifth by the US.

Those companies that have found new markets in strong growth economies, like Asia, or deal in high quality consumer goods, such as watches, have found the going easier. But traditional markets are expected to shrink further next year as government stimulus packages, launched during the depths of recession, start to expire.

Interest rate hike?

All eyes will be on the SNB once again next year as it ponders the option of raising interest rates from their current basement level of 0.25 per cent.

The decision would require a careful juggling act. The central bank would not want to further dampen the expected slowing growth of economic output with a rate rise, nor jeopardise solid consumer spending that has helped prop up the domestic economy.

But experts predict an interest rate rise if gross domestic product growth picks up in the second half of 2011 or inflation starts to take hold. The SNB will also have one eye on housing prices that are rising alarmingly in some parts of the country.

On one thing all experts agree: Switzerland, as a small economy, will be affected by the fate of larger countries on which it relies for its economic success. On that score, the omens for 2011 look decidedly mixed.