Switzerland: Still Europe’s ‘Safe Haven’?

For a country accustomed to economic stability, news that trusted financial institutions had fallen foul of the markets caused much anger and dismay in Switzerland back in 2008. But the fact is that the Swiss experience of the global economic crisis was never quite as serious as some portrayed it. Some banks did receive government bailouts but the payouts were relatively small and soon repaid. And for all the fears of long-term damage, economically speaking, Switzerland today looks much like it normally looks: quietly prosperous and better off than most.

The government’s most recent growth report, published in early September, showed that gross domestic product (GDP) grew by 0.9% in the second quarter of 2010 and by 3.4% compared with a year earlier. The numbers were not spectacular, but followed several periods of improvement.

“The Swiss economy has recovered really well. We are already talking about the recession in the past tense,” says Professor Jan Egbert Sturm, director of the KOF Swiss Economic Institute. “It’s probably the best that we could hope for at the moment.” Overall, the economy is forecast to expand by 2-2.5% in 2010.

Roger Thomet, head of commercial banking Switzerland at HSBC, says that the rebound has been particularly impressive on the export side.

“At the end of 2008, Switzerland faced a dramatic weakening,” he says. “GDP contracted by 1.5% in 2009, its greatest decline since 1975. Exports, which are an important part of the economy, fell by 12.6%. But since the second half of last year, activity has picked up in many sectors, and the recovery is slowly advancing. So far, compared to other industrialised countries, Switzerland has weathered the crisis quite well.”

Particularly pleasing are the relatively low levels of unemployment. Having risen above four per cent last year, the rate fell to 3.6% this summer – thus helping to maintain a level of consumer confidence. “Like the German economy, Switzerland is doing rather well – probably better than people would have expected a year ago,” says Sturm.

The Swiss economy has remained resilient for two main reasons: the comparative strength of the currency and the health of its key industries. The weakness of the euro has encouraged many investors to see the Swiss franc as a safe haven, thus raising its value and increasing the worth of assets. Having been at roughly CHF1.5 last year, the euro has since fallen to roughly CHF1.3.

Sturm says the Swiss franc’s value is a worry for exporters, whose goods and services are now more expensive. But the impact so far is more theoretical than material. In fact, official figures report exports rose by 1.7% in 2Q10. “The strong value of the Swiss franc is a potential problem, but so far it hasn’t been that disturbing. The export figures show we are doing pretty well. Without the strong appreciation of the Swiss franc, they would have been even better,” says Sturm.

Thomet says worries about the currency are likely to be short-lived, as its value could well fall in the coming months. “I am confident that the world economy and particularly the economy in Europe will recover, and that a lot of money that has come in will flow out of Swiss francs again,” he says.

Resilient Industries

Switzerland’s three most important industries – financial services, pharmaceuticals and chemicals, and machinery – have each shown improvement in recent times.

The financial sector, in particular, is back to prosperity, according to Sturm: “The domestic Swiss banking sector has not been hit as hard as many people think. The big banks were hit very hard, but only those operating outside Switzerland, such as UBS. They had to scale down their headquarters, reduce their spending. But in relative terms, it was moderate.”

The biggest change today is that retail investors are now more wary about where they save their money. “After the crisis, some people didn’t trust the big banks and smaller banks found themselves overflowing with money. They didn’t know what to do with it all,” Sturm says.

The sector has benefited from record-low interest rates and the fact that investors from the eurozone have seen Switzerland as a safe haven compared with other areas of Europe. Swiss banks have therefore not added greatly to the unemployment rolls.

“You might have expected that a large number of jobs in the financial sector would have been lost, but that doesn’t appear to be the case, to any great extent,” Sturm says.

Thomet says Swiss banks learned their lessons from previous crises and adjusted their models accordingly: “Switzerland suffered a heavy real estate crisis in the 1990s, so the banks introduced rating schemes and risk adjusted pricing quite early on. They recently all passed stress tests set up by the Swiss Financial Market Supervisory Authority [FINMA].”

Meanwhile, the pharmaceutical sector – much of it based around Basel – has shown itself to be relatively recession-proof. Partly this is because it is not as sensitive to currency fluctuations as other industries. “Around the world, health systems are very strongly regulated. Hence, the price competition is different from other industries,” adds Sturm.

Switzerland’s numerous small and medium-sized firms, many of them specialising in niche machinery, have been most susceptible to falling global demand and the effect of the rising Swiss franc. But even these enterprises are showing signs of life. “Switzerland has a large number of firms producing very specific products. They tend to be small firms and they were quite badly hit by the crisis. But they are benefiting now from the upswing in Asia,” says Sturm.

SEPA, Swiss-style

The strength of the Swiss franc has encouraged some exporters to switch trade to euros in an effort to maintain business with partners in the eurozone. More than half of Switzerland’s exports are within the eurozone and more than two-thirds of its imports. It is in Switzerland’s interests to simplify trading mechanisms with its European counterparts.

Although Switzerland is not a member of the EU, it has long supported the introduction of the single euro payments area (SEPA), which aims to standardise euro payments among 32 member countries, thereby cutting transaction costs for all.

Much of the EU area has been slow to adopt SEPA – much to the frustration of the European Commission (EC). But Switzerland has taken SEPA to heart. Christian Schwinghammer, head of marketing at SIX Group, which provides the technical infrastructure for SEPA payments in Switzerland, says so far around half its banks – about 150 institutions – offer credit transfers using SEPA.

“We are surrounded by eurozone countries – Germany, France, Italy, Austria. We have always had intense relations with those countries – they represent more than two-thirds of imports and 50% of exports. That’s a good reason for Switzerland to be involved with SEPA from scratch,” says Schwinghammer.

The euro still accounts for only about 2% of payments overall in Switzerland, but this is increasing. According to Schwinghammer: “One reason is that the Swiss franc is getting stronger against the euro. Firms have started to use euros in order to have a shelter.”

Tony Richter, head of business development, payments and cash management at HSBC, says it is vital for banks in Switzerland, including HSBC, to offer the means for companies to operate efficiently in euros. “Most of the major multinational companies have some sort of treasury function in Switzerland, so we’re ensuring we have liquidity management tools in place,” he says. “For Switzerland, trading with the eurozone is massive and the payment flows in euros are significant. From an early stage, the Swiss saw that they needed euro clearing so they could interact efficiently with other SEPA countries.”

Take-up has been much more modest for SEPA Direct Debit (SDD). Schwinghammer estimates that less than 20 banks in Switzerland offer this option, reflecting the lack of ‘reachable’ parties throughout Europe.

“The big European banks are reluctant to take up SEPA,” Schwinghammer says. “Swiss SEPA transactions are comparatively well accepted compared to other European countries. Its SEPA credit transactions make up a few percentage points of overall volumes, despite conducting negligible euro trade overall. For SDDs, it is a lot slower – but then again, it is slow throughout Europe.” According to the EC’s most recent SEPA report, only 2,600 out of 8,000 EU-based banks offer SDD services.

Schwinghammer would like the EU to fix an end-date for the introduction of SEPA, seeing this as the only way to move reluctant banks. An EU mandate would not necessarily ensure take-up in Switzerland, but if major European banks go ahead, the Swiss will follow.

Richter says HSBC, which has already invested heavily in both the SEPA Credit Transfer (SCT) and SDD, is watching upcoming EU legislation to see what it means for its operation in Switzerland and elsewhere. “The SDD building block has been launched, but in a rather soft way,” he says. “There is new legislation coming into force from 1 November this year. We are ensuring that everyone’s compliant with that and expect volumes to increase rapidly in 2011.”

Thomet mentions two other topics facing banks in Switzerland at the moment: interest rates and Basel III. He says many banks expected interest rates to rise around the world but, in fact, rates have tended to remain low – leaving many banks at a loss. Meanwhile, the Basel III regulations, once agreed this autumn, are likely to have significant ramifications on capital requirements, and therefore on a host of banking activities.

Overall, says Thomet, the future looks, if not bright, at least brighter for Switzerland. “I’m optimistic that the economy is going well,” he says. “Slowly but steadily, we’re getting there.”

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