Swiss still intent on stabilising franc

Hidebrand (left) and Strauss-Kahn address the Zurich conference Keystone

Switzerland remains focused on reining in the rapidly strengthening franc, the Swiss National Bank (SNB) announced at a Zurich conference on monetary systems.

SNB chairman Philipp Hildebrand made the comment on Tuesday evening as the franc surged to record highs against the euro despite the introduction of massive bailout measures for indebted Eurozone nations – primarily Greece.

The SNB is reported to have made wholesale purchases of the euro worth tens of billions of francs in a bid to prop up the European currency and stop it sinking below SFr1.40. Swiss exporters are suffering as the rising franc makes their goods more expensive in Europe – Switzerland’s biggest market.

Last year, exporters were concerned at the euro sinking below SFr1.50 and now it is hovering between the SFr1.40 to SFr1.41 mark. Hildebrand said he was concerned that the strong franc could lead to a trend of price deflation.

Economists at Bank Sarasin believe the euro will remain under pressure for some time as fears remain that the Greek debt mountain crisis could spread to other countries, such as Italy, Portugal, Spain and Ireland.

Export fears

Swiss engineering exports fell by a fifth last year, but Sarasin’s Alessandro Bee believes exporters could survive the latest currency fluctuations as domestic economic conditions improve.

“Exporters will certainly feel the effects of the SFr1.40 mark against the euro, but the general economic situation is not as severe as it was a year ago and indicators are pointing to a robust recovery,” he told swissinfo.ch.

“But if the franc goes down to SFr1.35 against the euro, exporters might have to scale down production or even close down Swiss factories and move them to emerging markets.”

The recent market and currency volatility has been sparked by fears that Greece would default on its €300 billion debts. The European Union (EU) and the International Monetary Fund (IMF) have put together a €750 billion (SFr1.1 trillion) bailout package to help avert the threat.

Speaking at the Zurich conference on Tuesday evening, IMF managing director Dominique Strauss-Kahn expressed confidence that the bailout package combined with Greek public sector reforms would work.

Swiss irony

And he was confident that the bailout would stabilise other countries if they gort into trouble with their debts.

“One more, one less is not that much of a problem,” Strauss-Kahn told the conference. “We’re dealing with many countries and programs and we have the resources available to do so.”

The rescue fund comprises €500 billion from Eurozone countries and €250 billion from the IM .Switzerland, as an IMF member, could be called upon to provide an estimated SFr5.6 billion to that pot.

The irony of Switzerland – a non-member of the EU – paying to bail out a Eurozone country has not been lost on the media or some politicians. But Alessandro Bee believes the projected contribution makes perfect sense for Switzerland.

“The rescue fund was announced to create market stability and that could only be good news for Switzerland that sends most of its exports to Europe,” he told swissinfo.ch. “The fund would only be used to distribute loans in a worst case scenario and we do not think this situation would actually materialise.”

Greece has been struggling to sell bonds on the turbulent financial markets to help clear its debts. Calming the markets down should help other indebted countries, such as Italy, Portugal and Ireland, to find enough money to ease their woes without having to turn to the bailout fund, according to Bee.

The direct exposure of Swiss banks to shaky Greek investments is not as bad as feared earlier in the year.

How to do it

Earlier figures suggested the Swiss financial sector had $64 billion (SFr71 billion) tied up in Greece, but it later emerged that the figures were distorted by including the assets of Greek bank EFG Eurobank that was headquartered in Switzerland.

When EFG moved its HQ to Luxembourg this year, the level of “Swiss” bank investments in Greece sank to $3.6 billion.

Compared with Greece and its unmanageable €300-billion debt burden (around 115 per cent of GDP), Switzerland is in a relatively healthy position. Switzerland posted a SFr2.7 billion budget surplus last year while its debt sank to around 40 per cent of GDP.

This year, Switzerland is expected to overshoot its budget by SFr2.68 billion, which is forecast to reduce in 2011. Having experienced soaring public debt in the 1990s, Switzerland imposed a brake mechanism on public borrowing to keep it under control.

In November, the government outlined plans to cut spending by SFr1.5 billion annually over the next three years.

Matthew Allen, swissinfo.ch and agencies

Greek debt bailout

European nations this week launched the biggest-ever financial bailout of a country, hoping to calm markets wary that Greece’s rescue may be the first of several, expensive measures to shore up other economies.

The €750 funding comprises €500 billion from Eurozone countries and €250 billion from the IMF (existing funds that have now been directed as loans for struggling EU countries).

The €550 Eurozone contribution consists of an existing facility – beefed up to €110 billion – to help cover public finance difficulties. The remaining €440 billion is a “special purpose vehicle” that would provide loans for stricken countries.

Funds would only be dispersed if recipient countries undergo a strict diet of reforms.

Greece intends to bring its fiscal deficit down to the EU limit of three per cent of gross domestic product by 2014 from 13.6 per cent in 2009.

The first rescue of a member of the 16-nation bloc aims to stem a debt crisis that has shaken markets, dented confidence in the euro and begun to spread to fellow eurozone weaklings Portugal and Spain. Berlin’s hesitancy has fuelled market panic.

Eurozone leaders held a special summit over the weekend to formally launch the aid, following weeks of tough talk and procrastination due to public opposition to handouts for Greece.

Developing countries aid

Switzerland has pledged $10 million (SFr11 million) to help developing countries develop capacity building projects in the area of economic and financial policy.

Swiss economics minister signed a memorandum of understanding with the IMF in Zurich on Tuesday.

In 2007, the Swiss parliament approved a package of $51 million to help developing countries – such as Peru, South Africa, Egypt and Vietnam – implement fiscal reforms and fight against money laundering.

The extra $10 million was made available to bolster financial regulation supervision and other measures designed to help stave off the economic crisis.