Swiss Affairs

In a coordinated effort the major central banks yesterday decided to provide liquidity to the markets:

Central banks to extend provision of US dollar liquidity, Sept. 15, 2011

Here is the Swiss National Bank Press Release:

Central banks to extend provision of US dollar liquidity

"The Swiss National Bank (SNB) has decided, in coordination with the Bank of England, the Bank of Japan, the European Central Bank and the Federal Reserve, to offer US dollar liquidity with a term of 84 days to cover the end of the year. These tenders will be conducted in addition to the 7-day operations. The first 84-day US-dollar liquidity operation will be carried out on 12 October 2011. Further information about the US dollar operation and the technical requirements are posted on the SNB website (www.snb.ch/en/ifor/finmkt/id/finmkt_usdollars).
Information on related measures taken by other central banks is available on the following websites:"

Bank of England (www.bankofengland.co.uk) E
uropean Central Bank (www.ecb.int)
Bank of Japan (www.boj.or.j/en/)

Keywords: European Crisis, European Governance

Find here two interesting articles on Swiss monetary control:

Alexandre Ziegler about the latest peg of the Swiss franc:

Alexandre Ziegler, Kursuntergrenze, eine gute Idee?

Kohli and Rich after Switzerland introduced flexible exchange rates:

Ulrich Kohli, Georg Rich, Monetary Control: The Swiss Experience, Cato Journal, 1986

Keywords: Exchange Rates, Monetary Control, Swiss Franc, Swiss National Bank

As owner of a Swiss, export oriented company in the machining sector I am going through challenging times. We traditionally export to European countries and the US. Consequently, Euro and Dollar regions. The Swiss franc has appreciated 20 to 30% as compared to these currencies. This means, without taking measures, the margin of our products would decrease by these percentages. Needless to say that a normally very profitable company can currently show only very modest profits.

Due to our excellent market position we were able to compensate part of the margin decrease through price increases.

We have also done some currency hedging, which is expensive in times of high currency market volatilities.

Besides these short term measures we have to make some long-term oriented entrepreneurial decisions:

We are an efficiently organized firm. Key parts manufacturing, assembly, R&D and marketing and sales are done inhouse. The rest, particularly the manufacturing of commoditized parts is outsourced. Traditionally, our company is sourcing parts from neighbouring Swiss enterprises.

We know that the purchasing power parity (PPP) of the Euro with the Swiss franc is at approx. 1.35. As the Swiss economy is highly interconnected with the European we make the assumption that the Swiss franc will depreciate further until it reaches PPP. It is uncertain how long this process will take.

Consequently, we have to take the entrepreneurial decision to "naturally hedge" our company. We made a thorough analysis of the value chain and the value added along this chain. We came to following conclusion:

- R&D will stay in Switzerland as it is key know how and we have excellent engineers.
- Marketing and sales will stay in Switzerland.
- Part of the (inhouse) assembly (high volume products) and of components manufacturing should be relocated to a Euro area country.
- Part of the outsourced components will in the future be bought from high quality European manufacturers.

Consequently, our company will change its face. From "a Swiss made" company we will transform to a "Swiss Engineering, Swiss quality" company. Doesn't sound too bad. Doesn't it? Management challenges will become bigger but we will be able to handle them, as we also can rely on the expriences of befriended entrepreneurs who have already gone this way.

We now have to decide where we build or buy an assembly/component manufacturing plant. We have to choose a country with highly skilled mechanics, flexible labor law and a stable, consistent government. Taking all these factors into account, the old European countries Germany, Italy, France and Spain are no choice. Reasons being high tax environment, non-flexibel labor law, high social costs, power oriented unions, bureaucracy.

Countries such as Slovakia, Czech Republic and Poland need to be looked at. Other Swiss entreprises made good experiences there.

Besides all this logical, entrepreneurial decision making process there is a question which is bothering me more and more: I was made aware of a Wolfgang Schäuble FT article on this website. He talks of a "cacophony of ideas" of how to resolve the European problems. What would happen. let us say to a Poland plant, if the Euro currency area would break apart? As a trained engineer I am not ideally positioned to answer such questions. I am currently much more thinking about potential political events and moves. I am getting distracted from thinking about future customer needs, new technical solutions, areas where I should invest to keep my company sustainable. I would be really grateful if Euro Politicians could make up their mind about the way they want to go in the future. I dare to say that their "cacophony" is currently hurting industry more and more.

Keywords: Euro/Swiss franc, Volatility in Currency Markets, Entrepreneurial decisions

SVC: Swiss Issues Wirtschaftspolitik; Modell Schweiz im Wandel: Chancen und Risiken für KMU

Keywords: Swiss Economy, Swiss Mid Market Firms

Tyler Cowen (with links to Scott Sumner and Matt Yglesias) about potential consequences of the Swiss National Bank decision:

MarginalRevolution: Can the Swiss peg the franc? by Tyler Cowen

Keywords: Switzerland, Swiss National Bank, Swiss Franc

August 6, 2011

Keywords: Switzerland, Swiss Franc

The expected happened. Switzerland caps franc at EUR/CHF 1.20. As purchase price parity is approx. at 1.35 to 1.40 further action can not be excluded.

WSJ: Switzerland Caps Franc, Sept. 6, 2011

Keywords: Swiss Franc, Euro, Dollar

The Economist has an article about how countries such as Brazil, Australia and Switzerland can learn to live with strong currencies. Each country faces different problems. Tax breaks could be applicable in all strong currency countries. Overall, a strong currency is bad news for me-too producers. Highly specialized firms and niche players might be able to adapt. For the long-term, continous investments in education and innovation are key measures.

In the short-term, firms with a unique offering could ask customers abroad to accept the bills in the respective currency of the exporter. Optimizing prices could also be a strategy. Exporters should also not forget that banks offer hedging instruments. However, this is rather for the short-term as nobody would be willing to bear long-term currency risk.

The Economist: Too strong for comfort; How to live with an overvalued currency, Sept. 3, 2011

Keywords: Currencies, Overvalued Currencies

The Financial Times yesterday published an article about the weakening Swiss franc.

Financial Times: Franken erleidet Schwächeanfall, August 29, 2011

The Swiss Economic Institute about the weakening Swiss economy:

KOF Economic Barometer – Sharp Fall, August 26, 2011

Keywords: Swiss Economy, Swiss Franc

The Swiss Federal Council proposed a 2 billion Swiss Franc support program for enterprises which suffer from the highly over-valued Swiss franc. This proposition still has to be accepted by the Swiss government. Various entrepreneurs announce that they are in fact in deep problems due to the Euro/Swiss franc exchange rate (a bubble occurence) but that they can help themselves. This is the pride of entrepreneurs. We believe that government should invest (part) of the money in the apprentice system and universities. Areas where the economy heavily gains from government activities. Tax reductions would also be welcome.

Keywords: Eur/CHF Exchange Rate, Swiss Economic Problems

The Euro/Swiss franc exchange rate is currently close to 1.18. As compared to the Euro the Swiss franc depreciated approx. 17% over the last weeks. As Switzerland is highly connected with the EU economy, various experts expect the Euro/Swiss franc exchange rate to balance at 1.30 to 1.40.

A further heavy depreciation of the Swiss franc could happen sooner than later. Economic data from Germany and other trading partners of Switzerland are showing stronger growth which will strengthen the Euro as compared to the Swiss franc.

It can also be expected that the Eurozone is making positive steps towards crisis resolution as politicians seem to be more and more aware of the urgency for a consistent approach.

As Switzerland is heavily dependent on exports, it can be expected that the strong Swiss franc will have a major negative impact on the economy within the coming months. Various experts do not exclude a recession.

Keywords: Switzerland, Swiss Franc

Wir haben kurz nach Ankündigung des CHF 2 Mia. Hilfspaketes des Bundesrates festgehalten, dass eine heftige Verteildiskussion stattfinden wird.

Das vorherzusagen war ja auch nicht schwierig. Die Ankündigung der Verteilung einer CHF 2 Mia. Summe, ohne die Erläuterung von Details zum Verteilplan, weckt selbstverständlich Begehrlichkeiten.

Wir erachten es nicht unbedingt als falsch, die Wirtschaft in schwierigen Zeiten zu stimulieren. Grundsätzlich geht es ja um die Rückverteilung von Steuereinnahmen an die Zahler. Zumindest sollte es so sein! Problematisch wird es, wenn Umverteilung ins Spiel kommt und Strukturerhaltungspolitik betrieben wird.

Mit dem Einsatz von derartigen öffentlichen Mitteln müssen unseres Erachtens die Starken (= Grundpfeiler unserer gesunden und innovativen Wirtschaft) gestützt werden. Die Nicht-Erfolgreichen sollen etwas an ihrem Geschäftsmodell ändern oder sich anderen Tätigkeiten zuwenden und das Feld den Erfolgreichen überlassen.

Die von der Economiesuisse vorgeschlagene Steuerbefreiung für dieses Jahr ist uns daher sympathisch.

Neben den erfolgreichen KMU und Grossunternehmen sind die Hochschulen und die Lehrlingsausbildung enorm wichtige Eckpfeiler unseres Volkswirtschaft. Vielleicht sollte man einen Teil der Gelder in die Förderung dieser wichtigen Institutionen investieren. Jene, welche die Gelder über Steuern dem Bund überwiesen haben, hätten da wohl kaum ein Problem.

The Bernanke speech signalled the world that the US economy as well as the global economy might be in a better state than many expected. This had an immediate effect on the Swiss franc, which further depreciated. The Franc is still far away from purchasing power parity with the Euro, which is approx. EUR/Swiss franc = 1.35. As the Swiss economy is cooling down, the Swiss National Bank is expanding money supply and local Swiss banks might charge customers for holding Swiss franc deposits, making new investments into the Swiss franc for speculative reasons might be not a very intelligent idea. People holding Swiss franc should now definitely diversify into other currencies, such as the Euro.

The Swiss franc is expected to weaken further.

As Switzerland is highly interconnected with the Eurozone, we expect that the Swiss franc will sooner or later match purchasing power parity with the Euro. However, it will definitely not be used as toilet paper as some alarmists want to see it:

Handelszeitung: Geldpolitik: Papiertiger, August 26, 2011

Related:

Bloomberg: Franc Weakens After Bernanke Speech, Concern Banks May Charge for Deposits, August 26, 2011

As Switzerland is going through a severe economic period due to the strong Swiss franc, the Swiss Federal Council yesterday decided to provide Swiss franc 2 billion of economic stimulus to the Swiss economy. According to the latest knowledge, beneficiaries should mainly be tourist enterprises and a selection of export firms.

The details of the allocation of the money are not known yet. The allocation key will be part of the discussion of the Swiss parliament this autumn.

A simple idea could be corporate tax refunds. The allocation could be proportional to the amount of corporate taxes paid during a past period to be defined. Beneficiaries should be enterprises which maintain a certain infrastructure in Switzerland and employ people in the country.

With such an allocation, competitive, profitable enterprises (which are the cornerstones of the Swiss economy) would be strengthened.

Keywords: Swiss Economic Stimulus, Allocation of Stimulus Money

On August 9, 2011, "Big Trends" warned of a bubble in the Swiss franc. An overvaluation is in fact obvious, as purchasing power parity to the Euro is approx. at an EUR/Swiss franc exchange rate of 1.35 to 1.40.

In the last days, the Swiss franc corrected heavily, as following graph shows:

Some reasons for the depreciation:

- Swiss National Bank Interventions
- Europe could stabilize as politics works towards more coordinated efforts for crisis resolution
- Sooner or later, the introduction of Eurobonds could become reality
- Stock prices improved over the last days
- Various sectors of the Swiss economy are suffering due to the strong Swiss franc and the slow down of the global economy

Related:

Swisscanto's Thomas Haerter says that Swiss franc is "overvalued" by 30% to 40%

Investors holding Swiss francs should probably diversify into the US Dollar and the Euro

Swiss franc still heavily overvalued; further substantial depreciation can be expected

Keywords: Swiss Franc Overvaluation, Purchasing Power Parity

Bloomberg Video: Haerter Says Swiss Franc Is 'Overvalued' by 30 to 40%, August 15, 2011

Thomas Haerter, chief strategist at Swisscanto Asset Management AG, talks about the outlook for the Swiss franc. He speaks from Zurich with Linzie Janis on Bloomberg Television's "First Look." (Source: Bloomberg)

Keywords: Swiss Economy, Swiss Franc

In various posts we have mentioned that the Swiss franc is heavily overvalued as compared to the US Dollar and the Euro. The EUR/Swiss franc exchange rate was almost 1 this week. As such an overvalued Swiss franc is extremely harmful for the export oriented Swiss economy, the Swiss National Bank, with a strong moral support from politics, started to intervene and will continue to do so. It is one scenario that the Swiss National Bank will determine a lower exchange rate limit for the Euro. A limit which would be defended with all means. Some experts say that such a limit could be increased over time. The OECD earlier this year published research saying that the Swiss franc is massively overvalued. At a time when the EUR/Swiss franc exchange rate was still substantially higher than today. Consequently, a further depreciation of the Swiss franc is likely.

The Swiss economy already suffered during the period of the extremely strong Swiss franc and is expected to cool down. In combination with the continuing strong Central Bank intervention, it is advisable to reduce Swiss franc investments.

Daily Markets is now even asking whether the US Dollar could "Get Safe Haven Flows with JPY and CHF Undermined by Their Central Banks".

However, the Swiss National Bank is not undermining the Swiss franc. It follows a policy which will eliminate an "absurd" over-valuation, caused by political insecurity in the US and the Euro Area, weakening economies and monetary expansion in the US and the Euro Area. Once the situation in the US and Europe stabilizes, the Swiss franc could rapidly depreciate. Switching Swiss franc investments into the US Dollar and the Euro is probably a good idea.

Keywords: Swiss Franc, Overvaluation of Swiss Franc

Find here an excerpt of an Aug. 11, 2011, Daily Markets article:

"Will USD Get Safe Haven Flows with JPY and CHF Undermined by Their Central Banks

For currency traders there is concern that the BOJ is ready to come back into the market and intervene for a second straight week and combining that with the talk and actions coming out of the SNB, we are seeing traders running out of alternatives in regards to where to park their money. That leaves the USD as the de facto currency and a weakening USD is not one of the concerns of monetary authorities in the US. Gold will also continue to be a favored destination for safe haven flows."

The Euro/Swiss franc exchange rate is currently in the range of 1.10. This is still a massive overvaluation, as an OECD analysis has shown:

MarketObservation: OECD: Swiss franc is massively overvalued against the Euro and the Dollar, July 22, 2011

It can be expected that the Swiss franc will further depreciate as the economic outlook for Switzerland is not very positive and the Swiss National Bank is ready to intervene massively.

Keywords: Swiss Franc, Swiss Economy

As mentioned before, Switzerland is going through extremely difficult times due to the dramatic appreciation of the Swiss franc. Many exporters are suffering tremendously. A continuation of the situation could lead to a severe recession.

The Swiss National Bank has conclusively demonstrated that they are ready to fight this situation with all means. Financial Times Germany reports that the Swiss National Bank could fix the exchange rate between the Swiss franc and the Euro, if necessary. Analysts calculated that the Swiss franc is overvalued by 25% to 30% as compared to the Euro. A fixed exchange rate could thus be substantially higher than the current rate.

Financial Times Deutschland: Schweiz könnte Franken an den Euro fesseln, August 11, 2011

Keywords: Swiss Economy, Swiss Franc, Euro

Thomas Jordan, Vice-President of the Swiss National Bank says that the Swiss Economy is in a dramatic situation due to the strong appreciation of the Swiss franc as compared to the Euro and the Dollar, in combination with a starting slow down of the global economy.

Tagesanzeiger: «Die Situation ist dramatisch», August 11, 2011

Keywords: Swiss Economy, Swiss Franc, Global Economy