Greek woes and rising franc harm Swiss exports

Experts argue that a small, gradual appreciation of the franc is a good policy imagepoint

Switzerland’s struggling exporters are facing further difficulties in the face of a steadily strengthening franc that has been partly fuelled by Greek economic woes.

Swiss exports slumped alarmingly last year, a trend that looks set to continue. The Swiss National Bank (SNB) continues to intervene, but has dropped its policy of setting a fixed target for the franc against the euro.

The euro has taken a pasting in recent weeks as doubts grow about European Union member Greece’s ability to control its debts. Speculators have been betting against the euro as fears surfaced about other indebted EU nations such as Spain and Italy.

The result in Switzerland has been a strengthening of the franc by about five cents since mid-December. This has inflated the price of Swiss goods sold abroad, with the EU accounting for some 70 per cent of exports.

Swiss exporters are unhappy with the development, particularly after witnessing a 12.6 per cent slump in business in 2009 – the sharpest annual fall since 1944.

Swissmem, the umbrella group for the electrical, machinery and metals industry, called the franc’s appreciation “untimely” and worried that the situation could undermine a recovery. The body has repeatedly argued that an exchange rate of less than 1.5 francs against the euro could damage margins.

Change of course

In March of last year, the SNB expressly adopted a policy of keeping the franc to no lower than that target against the European currency.

But the central bank changed its policy in December to allow the franc to roam freely, only intervening in the foreign exchange markets in the event of sharp volatility. Although the SNB has kept quiet on the issue, many observers believe it has been forced to step in several times this year already.

The change in general policy was generated by an upswing in Switzerland’s economic condition and by the desire to play by a set of unwritten “good neighbour” rules , according to Jan Egbert Sturm of the Swiss Economic Institute (KOF).

“The SNB changed course when the worst of the economic downturn seemed to be over and there was less need to keep the currency rate fixed to the euro,” Sturm told swissinfo.ch. “But if the SNB had let go earlier, the appreciation of the franc would have had much worse consequences for the Swiss economy.”

Switzerland did not then want to be labelled as an international bad guy by distorting competition in favour of its exporters, Sturm argued. China, for instance, has long been criticised for keeping its currency artificially low.

“Allowing a small, gradual appreciation is better than adopting a ‘beggar thy neighbour’ policy,” Sturm said.

Greek bailout

In mid-December, one euro cost SFr1.5. But since the policy change, it now only takes around SFr1.46-7 to buy the same euro, while at times the exchange rate has dipped to as low as SFr1.43.

Sturm said it was impossible to gauge just how much effect the SNB policy change has had on the franc’s appreciation compared with the turmoil in Greece.

But foreign exchange specialist Ursina Kubli at Bank Sarasin does not expect the “Greek effect” on the Euro to last long. “We think that the current fears for the euro crisis are overdone,” she told swissinfo.ch. “We expect to see a rebound in due course.”

“There are strong rumours that Greece will get support from the EU or the IMF [International Monetary Fund]. All EU members would suffer a lot of Greece defaults. We think that Greece can grow its way out of [its current problems].”

The question for Swiss exporters is how long that would take. Unfortunately for them, the general consensus is that the franc could remain strong against the euro for at least the first half of 2010.

Matthew Allen, swissinfo.ch

Greek pickle

Greece faces a mountainous debt of more than €300 billion (SFr440 billion). The shortfall in its budget stands at 12.7% of GDP – four times higher than EU rules allow.

The news was made worse by Greece admitting that it had deliberately altered its statistics to cover up the worst of the problem until it was forced to uncover the full extent of its woes.

The country has announced a series of sharp cutbacks in public spending, sparking a nationwide public sector strike.

EU leaders met in Brussels on Thursday to discuss solutions to the problem. Measures on the table included a possible cash bailout of the stricken country.

EU president Herman von Rompuy said after the meeting that Europe was sending a message of solidarity to Greece.

However, no specific proposals emerged from the meeting, and the euro continued to fall against the dollar.

Greece’s dilemma has brought focus to bear on other debt-laden EU countries, particularly those in southern Europe such as Spain and Italy.

The direct influence of Greece’s problems on Swiss trade are limited as Switzerland exports only around 0.8% of its goods to that country.

However, markets are jittery about any company’s potential exposure to Greek debts. To reinforce that point, shares fell nearly 5% in reinsurance giant Swiss Re on Monday as the firm confirmed it held Greek bonds.

The worst effect on Swiss exporters has been indirect. The Euro has fallen in value at a steady pace since news of Greece’s debts has gathered pace this year.