Saturday, 21 February 2009

Switzerland - holes in their cheese and now their banks too

There is a provocative article about the possibility of Switzerland being threatened with bankruptcy and also having to join the Euro.
It is a sign of just how shock immune we are all becoming that I even had to question whether such an article would be worth reading. On balance I am not convinced by the reasoning given in the piece but it did coincide with other news about Swiss banks last week that adds another dimension to the story.
The author does not refer to the settlement between UBS and the US government in which potentially thousands of names who have held secret accounts with the Swiss bank would have to be released by UBS to the SEC and investigated for tax evasion.
This could have even larger long-term consequences to the Swiss economy than the troubles with Eastern European credits.
Anyway here is an excerpt from the piece:

Swiss banks have given billions of credit to Eastern Europe - now the customers cannot pay back the money. Switzerland is threatened with the fate of Iceland, says economist Arthur P. Schmidt.

In countries such as Poland, Hungary and Croatia, the Swiss franc has become an important currency. Thousands of households and small firms took out loans in Swiss francs, and not in the national currency zloty, forint, or kuna because of lower interest rates. In Hungary, 31 percent of all loans are in Swiss currency. Amongst household loans, they are almost 60 percent.

Now, the financial crisis has ended the era of cheap credit. As a result, Eastern European currencies are falling. At the end of September, one had to pay 46 francs for 100 Polish zlotys. Today it is 30 francs. That means more and more borrowers are having problems with interest payments and repayment. So the question is what effect this has on the Swiss financial marketplace. One who sees a dark future for Switzerland is economic expert Artur P. Schmidt. He believes that the Swiss franc is in danger because of the loans in Eastern Europe.
Switzerland, like Iceland, is threatened with a potential national bankruptcy. One consequence would be that the Swiss currency could fall massively in value — possibly even crash. Another would be that Switzerland’s credit rating would be massively downgraded. That would be a trauma for the country: Switzerland was always as a stronghold of stability. The franc could become an unstable soft currency. Then Switzerland would perhaps be forced to abandon the franc and take on the euro.

The last paragraph jumps through lots of "ifs" quite quickly to reach its conclusion.

Switzerland has enjoyed unusual benefits as a money center for many years in the smoke and mirrors world that is now starting to come apart and the reasons why bankers have had things relatively easy rested largely on secrecy and alleged prudence in financial management. The massive losses at UBS in all of the usual suspect securities and now the exposure to Eastern European problems suggests that the gnomes of Zurich may not have been much wiser than their counterparts in London and New York. Take away the secrecy assurance and quite a lot of the super-rich could decide that it's time to look elsewhere to park their money.

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