The Swiss battle with the rise in the value of their currency

10 posts

Niccolo and Donkey
Bracing for hard times in the world’s financial haven

The Globe and Mail

Catherine McLean

August 14, 2011

Daniel Ackermann’s family has run a hotel in the small Swiss ski town of Arosa for three generations, offering guests a chance to abandon their everyday worries as they wander in the fresh alpine air.

But escape from the world’s financial woes is becoming more elusive even here in the Swiss Alps. The fallout from debt problems in the United States and Europe is threatening to travel all the way to the doorstep of Mr. Ackermann’s Hotel Hohe Promenade.

The culprit is an out-of-control Swiss franc. That currency has rocketed in value recently as investors view the small country of 7.5 million residents, with its stable political and financial systems, as one of the few safe places to keep their money.

As the so-called Swissie shatters records against major currencies like the U.S. dollar and the euro, businesses find themselves bracing for the economic slowdown it promises to bring. Suddenly everything Swiss, from chocolate and chemicals to vacations in the Alps, has become much more expensive for the world to buy.

From his peaceful spot, Mr. Ackermann views the Swissie’s rise as nothing but scaremongering in far-flung financial markets.

“Ìt’s clearly overvalued at the moment,” he says, echoing the argument of citizens, politicians and business across the country.

The world isn’t listening, however, and Mr. Ackermann is bracing for harder times ahead. Sales and overnight stays this summer were consistent with last year, but he doesn’t expect that trend to continue.

`’Switzerland will be very expensive for foreign guests next winter,” Mr. Ackermann admits.

The Swiss franc has always been a go-to currency when times get tough. One perceived advantage is its stable political system, led by a group of seven elected politicians who take collective decisions. The Swiss also have the reputation of being careful with their finances. They have current-account surpluses and low unemployment and debt.

In the past, other currencies also acted as safe havens for investors, specifically the Japanese yen and the greenback, according to Ursina Kubli, a foreign strategist and economist at Bank Sarasin in Zurich. This time around the Swiss franc finds itself outstripping demand for the other currencies, she said.

The U.S. has taken a serious hit with its weak economy and the loss of its top triple-A debt rating from Standard & Poor’s. As for the yen, investors have bid it up to the highest level in decades, but the government is intervening in order to protect the country as it recovers from the devastating tsunami and earthquake in March.

The Swiss now find themselves strapped with a currency overvalued by more than 30 per cent, Ms. Kubli estimated this week. As of Friday, the Swiss franc traded at 77 cents against the U.S. dollar, a 16.7-per-cent increase this year. Against the euro, it is now near parity at 1.1 francs, an 11.3-per-cent jump this year. It’s an ironic kind of reward for a country that has so far managed to stave off economic disaster. The Swiss are learning there’s a downside when the class nerd becomes the most popular kid during exam time.

“Ìt’s the curse of the diligent student,” Ms. Kubli said. “It’s being punished for doing its homework very nicely in recent years.” The Swiss National Bank is struggling to rein in the Swissie. It has injected Swiss francs into the market and cut interest rates. The currency finally started to retreat when a member of the SNB disclosed to Swiss newspaper Tages-Anzeiger last week that the bank is considering a wide range of options, including temporarily pegging the franc to the euro.

Intervention in the foreign exchange markets by the SNB will only be successful if investors believe the strong Swissie is hurting the economy and can no longer serve as a safe haven, according to a Bank Sarasin report. Other methods to stop its rise could include negative interest rates, a tactic used in the 1970s, the report said, though that would go against the typical financial practices in advanced countries.

The franc’s gains are “putting the Swiss economy on a precarious path,” Ms. Kubli said.

So far this year, the Swiss economy has managed to remain buoyant despite the rising currency and financial difficulties among its European neighbours. Unemployment actually fell in July, reaching 2.8 per cent. Exports slowed in the first half of 2011, but still managed to eke out a 4.3-per-cent increase as demand in Asia offset a slump in Europe.

Its financial health is expected to take a turn for the worse in coming months. Job losses are predicted as demand for pricey Swiss goods dries up abroad, a big headache for a country that depends on exports for half of its gross domestic product. The Swiss National Bank has forecast GDP will grow by 2 per cent this year, and Bank Sarasin reckons that will shrink to a 1-per-cent gain in 2012.

A wide range of Swiss exporters from metal companies to drug makers are already struggling with the high Swiss franc. Chemical company Lonza Group Ltd. recently reported an 8.3-per-cent drop in first-half revenue, while drug maker Roche Holding AG’s sales fell 12 per cent in that period, and food maker Nestlé SA posted a 13-per-cent decline in revenue.

The strong Swiss franc combined with economic woes around the world and higher raw material costs ``has made for an extremely tough, volatile and competitive environment,” Nestlé chief executive officer Paul Bulcke said in the earnings statement this week.

So far, exporters are adapting by slicing their profit margins, making employees work longer hours and expanding abroad. But there are worries that some businesses may go under if the Swissie doesn’t lose steam, while others may move production to cheaper markets in Europe.

It’s all taking a toll on Swiss consumers. Consumer sentiment slipped in July to negative 17 points from a negative one point in April, according to the State Secretariat for Economic Affairs. Not only do they face a stormy economy thanks to the strong Swiss franc, but also stubbornly high prices in the shops.

Swiss newspapers are full of stories about how consumers are getting ripped off for bikes, clothes, food and other products that are much cheaper just across the border in Italy, Austria, Germany or France. The country’s consumer protection organization has registered a big increase in complaints in recent weeks, according to its leader Sara Stalder. Her group recently examined a group of 150 products, including diapers, toothbrushes, clothes and toys, and found that they were on average 90 per cent more expensive in Switzerland than in surrounding countries.

“They are not passing on the currency gains,” said Ms. Stalder, who is calling on importers to slash prices by 20 per cent. “That can’t happen any longer.’’ Just as the high Swissie is driving consumers across the border to shop, the tourism industry expects they will also spurn the Alps for cheaper vacations in other countries.

That’s a major challenge for hotel owners like Mr. Ackermann in Arosa, but he sees no reason to panic. Instead of slashing room rates, he is focusing on continuing to offer the high quality service that Switzerland is known for to bring customers back.

“It doesn’t make me happy, but worrying about it is the wrong way to go,” Mr. Ackermann said. “Those businesses who have done their homework in the last few years and have worked diligently will come out ahead even in this crisis.’’ Though it’s hard to shut out the financial crisis that is captivating the world, guests at the Hotel Hohe Promenade won’t hear about it from Mr. Ackermann.

“I shouldn’t bring my problems to the guests,” he says. “That would be wrong. They are here on vacation and they should leave their problems at home.”
Niccolo and Donkey
Beefy Rep

“The Swiss franc has always been a go-to currency when times get tough. One perceived advantage is its stable political system, led by a group of seven elected politicians who take collective decisions. The Swiss also have the reputation of being careful with their finances. They have current-account surpluses and low unemployment and debt....
The currency finally started to retreat when a member of the SNB disclosed to Swiss newspaper Tages-Anzeiger last week that the bank is considering a wide range of options, including temporarily pegging the franc to the euro."

Hidden subtext: the Franc is valued because the euro is fucked.

Yes. We've never heard of a country becoming impoverished because its currency was worth too much. The ECB was willing to print money to try to solve problems, and now it's opened pandora's box.
President Camacho
This 7 member committee apparently takes the place of the PR man who functions as the “executive” in Anglo-democracies, which are ruled by the most politically expedient special interest groups at the exclusion of all others. The Swiss executive branch would seem to be almost an oligarchy of democratically-elected statesmen, each representing distinct regional interests. Contrast this with the nomadic clique of elites and opaque financial magnates that drive American politics.

Reading the wiki on the council it seems easy to pinpoint the numerous other advantages the Swiss system has over Anglo-“liberalism”:

Stability, continuity:
Lack of political theater and media circuses:
Subordination of the Federal Judiciary to politics:
Of course the Swiss party system is a plurality and not a duopoly, and direct referenda give the people a defense against the sort of top-down legislation pushed through by lobbyists in America. Citizenship requirements are stricter, resulting in more stable communities and only allowing for gradual and not revolutionary change. The reactionary "Swiss People's Party" has just recently picked up an additional Federal Council seat at the expense of some social democrats, reflecting the increasingly popular Swiss aversion to cancerous EU types.

It seems Switzerland has managed a peaceful synthesis of the two dominant strains of modern Western political thought-- Anglo-Liberalism and German Socialism-- and has proven itself remarkably immune to the crises facing the rest of the West. When your biggest problem is a remarkably strong currency, you have to be doing something right.
Niccolo and Donkey
The Cool Club President Camacho Global Squash Champion SteamshipTime

Swiss bid to peg 'safe haven' franc to the euro stuns currency traders


Printing money -> capital flight + giving stuff away. :thumbsdown: Swiss.

Beefy Rep

Stupid. Any Swiss with savings should be outraged at the move.

Niccolo and Donkey

Swiss get to have the same amount of stuff or more by doing the same amount of work or less. They take their fiat currency, bring it to another country, give the pieces of paper, and get to bring something back. How is this bad? They are getting wealthier.

Why the obsession with exports? A positive balance of trade is a net negative on an economy and standard of living. Let those companies "suffer". A stronger currency brings in more capital investment which will create more jobs anyways. Plus, an appreciating currency makes it easier for producers to purchase materials and inputs from abroad.

I agree with what The Cool Club said.