Switzerland awaits Greek default contagion

Greek banks were ordered by the government to open Wednesday to help desperate pensioners without ATM cards cash up to €120 from their retirement checks Keystone

Swiss exporters and hoteliers awoke on Wednesday morning nervously awaiting the knock-on effects of Greece’s €1.6 billion (CHF1.66 billion) loan repayment default to the International Monetary Fund (IMF).

Having lost ground on Tuesday in anticipation of the default, the world’s financial markets regained some losses on the morning after the storm, with the SMI mirroring the Asian markets by opening slightly higher. It closed the day up almost 1.5%. The Swiss franc-euro exchange rate stayed unchanged at around CHF1.04.

The markets were buoyed by news that European Union ministers would discuss a new bail-out request from Greece that would grant the beleaguered country €29.1 billion in emergency aid. They ended up saying they would review the request depending on how Greeks vote on Sunday in the referendum Greek Prime Minister Alexis Tsipras has called on credit terms.

Also on Wednesday, eurozone central bankers will meet to decide on the European Central Bank’s (ECB) response to the Greek default.

Despite Greece defaulting on its IMF payment, the issue of a Grexit – Greece leaving the euro – is still very much up in the air. Greece has called a referendum on July 5 to ask the public whether they agree with new austerity measures that have been proposed by its government.

Another looming deadline is a Greek debt repayment to the ECB on July 20.

Intervention

In the meantime, the Swiss National Bank (SNB) will be closely monitoring the foreign exchange markets for signs of the franc strengthening against the euro.

SNB chairman Thomas Jordan admitted on Tuesday that the central bank had recently intervened in the forex markets to keep the franc from appreciating too strongly against the euro. It abandoned a CHF1.20 cap against the euro in January, leaving the franc hovering at around CHF1.05 ever since.

“The Greek situation is weighing on financial markets. The uncertainty linked to Greece means the Swiss franc remains a safe-haven currency,” Jordan told a meeting of Swiss watchmakers last week. “If Greece were to leave the euro, one would need to expect market turbulence. It’s very difficult to predict. The SNB is watching very closely.”

Jordan did not give any details of the recent SNB forex intervention, the first since January, but the continued Greek volatility could prove a tough examination for the newest SNB board member, Andrea Maechler, who started work on Wednesday in charge of SNB intervention strategy.

Ultra-low rate

After its June 18 monetary policy meeting, the SNB chose to keep interest rates at ultra-low levels but decided against imposing any extra measures in anticipation of a Grexit.

The CHF1.05 euro exchange rate has piled pressure on Swiss exporters and the tourism industry, making Swiss goods more expensive in its main eurozone market and stays in Switzerland more expensive for foreign tourists.

Swiss economic growth contracted slightly in the first quarter of the year, surprising many economists who thought it would take longer for Switzerland to feel the effects of the euro depreciation against the franc. A second successive quarter of negative growth would signal a technical recession.

Government response

The Swiss cabinet released a communiqué on Wednesday stating that there is “no serious crisis threatening the economy” in Switzerland despite the volatility surrounding Greece and the prospects of weak economic growth for the next few quarters.

The cabinet said it fully supported the SNB’s policies, but acknowledged that there could be hard times ahead for some industries.

“In sectors that are particularly exposed to the strong Swiss franc [identified by economists as mainly tourism, machinery and precision tools], there is the threat of a substantial loss of jobs,” the statement read.

The cabinet believes that a set of corporate tax reforms, due to be debated in parliament in the autumn, could help to alleviate problems facing some companies.