Final Write-Up Swiss Economy

8/7/2019 Final Write-Up Swiss Economy

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Switzerland in the Financial Crisis

Switzerland as has been the case with many countries around the world has been hit by

the global recession of the early twenty first century. Marked by decreases in GDP, industrial

production, and consumer demand as well as an increase in unemployment the Swiss economy

was marked with a recession starting in late 2008.1 However economic indicators have shown

that in comparison to other OECD countries that Switzerland may have not been hit as hard as

others by the recession and may be showing signs of recovery as early as the third quarter of

2009.

One of the main indicators of Switzerland is GDP. Graph one show¶s us the percentage

change in GDP when compared to the corresponding quarter of the previous year.

Graph 1: Swiss National Bank Monthly Statistics

By analyzing the graph one can see a large dip in GDP from 2007-2008 which marked

the beginning of the recessionary period. From the third quarter of 2008 up until the first quarter

of 2009 GDP from 3% to -2.5% which is one of the largest drops in GDP in recent years. If we

1 http://www.forbes.com/2009/03/03/switzerland-banks-exports-markets-economy-recession-25.html

(Switzerland saw two consecutive quarters of negative growth in the final six months of 2008)



were to analyze GDP further (see table 1.1) we can see that these reductions are shows in fixed

capital and overall demand. Private consumption while not increasing at a tremendous rate did

still increase overall between the years of 2007-2008. This may be accounted for by the large

growth seen in government expenditures. Fixed capital decreased by 2.2% which was mostly

drawn out by decreases in equipment. Exports which is primarily the main driver of the Swiss

economy due to its small population of around 7.5 million people decline 3.2% overall from the

previous quarter in 2008. This is due partly to the start of the global recession in which other

countries continued to demand less.

Table 1.1: Swiss National Bank Monthly Statistics



This downward spiraling effect continued to float into the services category as well. Later

in 2009 driven by a steep decline in the housing industry and credit markets two of Switzerland¶s

two largest banks UBS and CS with large losses on their balance sheet. Because these banks play

such a large role not only in Switzerland but on the global spectrum as well these two and

primarily UBS took large hits when the credit crisis came into play. The financial sector in

Switzerland is comprised of many local banks and then the two main banks. (UBS and CS)

Table 1.2, directly show the substantial losses seen in the financial sectors starting in late 2009.

UBS which is the second largest bank focusing on wealth management was hit hard by the credit

crisis and as has been reported by U.S. today had to write down some $37.4 billion due to the



crisis. This was the largest write down reported by any bank to date.2 This has led to a decrease

in confidence in the banking system as the government has sought to reassure citizens and

continues to reassess its policy to make sure that these two big banks are not too big to fail.

Furthermore the decrease in confidence in the banking system, the decrease in fees and

commissions from banks, as well as the decrease of the general economy has led to a dramatic

decrease in the Swiss stock exchange.

Table 1.2 Swiss National Bank Banking Statistics.

Government¶s Response to the Crisis:

In response to the global crisis Switzerland and the SNB have worked hand in hand in

providing both monetary and fiscal policy in order to help get them out of what has been deemed

by most economists as a moderate recession in Switzerland. Because Switzerland is not a part of

2 UBS, Deutsche Bank wallow in write-downs. http://www.usatoday.com/money/economy/2008-04-01-

404003957_x.htm?csp=34



the Euro-Zone it can conduct monetary policy in its own interests in order to resolve the

recession.

The SNB was originally developed as a central bank that would be used to install

monetary policy with its main goal of being able to stabilize prices, while taking economic

activity into account.3 The SNB conducts monetary policy by using the three month Libor

interest rate. Figure 2 below shows Switzerland¶s monetary policy since January 2008. As a rule

of thumb the SNB generally sets a rate within one percentage point and seems to stay in that

range. During Q4 of 2008 the SNB decided to lower interest rates in the 2.25%-3.25% level. This

was generally done with the repurchase of short term maturities.

4

As the recession seemed to

deepen and the future economic concerns were realized in 2009 they later reduced the rate to a

range of 0%-.75% where it sits today at around .25%. Along with this policy Switzerland has

also sought to install some other measures that seem to deviate away from the norms of monetary

policy. They have extended the long term repurchase with banks which looks to target liquidity

in the market. And they have also aimed to purchase foreign currency which has been used to

prevent appreciation as well as to limit deflation. All together Switzerland has used their

monetary policy to help stimulate investment back into the economy and seems to have created

at least some brief increases key economic indicators as early as 2010.

3Goals and responsibilities of the SNB (Brief Survey) http://www.snb.ch/en/iabout/snb/id/snb_tasks

4OECD write-up on Swiss economy. P.45.



Figure 2: OECD Economic Survey Switzerland Volume 2009. Swiss Monetary Policy since

January of 2008.

When it comes to fiscal policy Switzerland has developed a firm policy known as the

debt brake rule. This rule which came into place in 2003 was created as a way to control debt and

balance budgets. The plan calls for a year ahead ceiling that is adjusted cyclically.5 However

there are certain extraordinary exceptions to the rule. In 2009 parliament passes a new

supplementary addition to the debt brake rule that would create an additional account that could

account for fiscal spending during the recession. The hopes were to amortize this account with

the ordinary budget within six years and to further proceed from then on with the rule.

Another tactics used by Switzerland was passing a series of stimulus packages in order to

help stimulate the economy. (Detail from the stimulus package are listed below in figure 2.2.

Note that all figures are in millions of Francs or CHF) Overall a total of around 6.2 billion francs

will be spent in 2009 and 2010 in order to get Switzerland back on its feet. One Swiss news

provider stated that the majority of the package will be used in stabilizing the job market by

5IMF A New Rule, The Swiss Debt Brake Rule.



focusing on creating temporary jobs for the unemployed, specialized work in tourism, nature

protection, and youth agencies. Also added to this package were subsidies for health premiums

as well as delaying the addition of a value added tax in order to help spur consumer spending in

the future.6

Figure 2.2: OECD Economic Survey Switzerland Volume 2009. Stimulus Package in 2009

and 2010.

Tied together fiscal policy in Switzerland seems to be no different than what other

countries are trying. Using deficit spending as a way to help spur investment and consumption

but one thing remains to be seen is just much this will affect Switzerland¶s newly installed fiscal

policy of the debt brake rule.

The final analysis comes down to how well these policies are working and whether the

government and the SNB will need to make further recommendations in the near future. As of

6Government Unveils New Stimulus Package. 2009.

http://www.swissinfo.ch/eng/politics/Government_unveils_new_stimulus_package.html?cid=980608&rss=true



recently, the State Secretariat for Economic Affairs SECO published a paper stating that the

Swiss economy is stabilizing and is expected to grow at a slow rate in 2010. GDP was set to

grow at around 1.4% which has been raised from prior estimates. As well estimates for

forecasted unemployment have been decreases from 4.9% to 4.3% in 2010.7 However

inflationary pressure may be something to watch out for in the future as the economy begins to

take off possible with these low interest rates. Currently prices rose ever so slightly in March

2010 to 103.8 representing a .9% month to month change. Also as was previously stated keeping

the budget deficit down and maintainable is definitely something that Switzerland will have to

look at over the next couple of years while trying to maintain the debt brake rule. All in all while

the worst may be behind us one can never be sure if Switzerland is out in the clear on this one as

the data continues to pile in.

By looking at graph 1 picture below we can see a large year to year

comparison dip in GDP from 2007-2008 marking the beginning of the

recession. Further analyze of GDP indicates that it was driven by reductions

in fixed capital and overall demand. Private consumption while not

increasing at a tremendous rate did still increase overall between 2007 and

2008. This may be accounted for by the large growth in the government

expenditures. Fixed capital decreased 2.2% which most coming from

decreases in equipment. Switzerland with a population of around 7.5 million

7 Economic Perspectives Slightly Brightening Up in 2010.

http://www.seco.admin.ch/aktuell/00277/01164/01980/index.html?lang=en&msg-id=32249



is primarily an export driven economy and a large portion of their economic

decline was driven by a 3.2% decline in export in 2008. This downward

spiraling effect continued to float into the services category later in 2009

mostly driven by a decline in financial services due in part to two of

Switzerland¶s two largest banks UBS and CS.

The financial sector in Switzerland is comprised many of many local banks

and the two big banks (UBS AG and CS). As was the case in most area these

banks saw substantial losses on their balance sheets located in table 1.2

below. Particularly seen by what the Swiss National Bank deems as the one

big bank (UBS). UBS which is the second largest bank focused on wealth

management was hit hard by the credit crisis and as reported by U.S. today

wrote down some $37.4 billion over the crisis. This was the largest write

down reported by any bank to date. (U.S. Today article 2008). This has led

to a decrease in confidence in the banking system as government has

sought to reassure citizens and continues to look at how to make sure these

big banks are not too big to fail. As has been the case fees and commission

from banks has decreases which has also been realized in a decrease in the

Swiss stock exchange.

Government¶s Response to the crisis.



In response to the global crisis Switzerland and SNB have worked

hand in hand in providing both monetary and fiscal tactics in order to help

get them out of what has been deemed by most economists as a moderate

recession. Because Switzerland is not apart of the Euro-Zone it can conduct

montary policy in it¶s own interests in trying to resovle the recession.

The SNB was developed as a central bank that would be used to install

monetary policy with it¶s main goal being to stablizie prices, while taking due

account to economic activity. (SNB Objectives) The SNB conducts monetary

policy by using the three month Libor interest rate. Figure 2.1 belwo shows

Switzerland¶s monetary policy since January 2008. As a rule the SNB

generaly sets a rate within one percentage point and seems to stay in that

range. During Q4 of 2008 the SNB decided to lower interest rates in the

2.25%-3.25% leel. This was generally done with the repurchase of short

term maturities. As the recession seemed to deepen and future economic

concerns were reaized in 2009 they later reduced the rate to a range of 0%-

.75% where it sits at today of around .25%. Switzerland also deviated a bit

from the norms in terms of monetary policy in taken two further measures

to stimulate the policy 1.)They extened long term repurchases with bank

seeking to target liquidity. 2.) They purchased foreign currency which was

used to prevent appreciation as well as limit deflation. All together

Switzerland used their expansionary monetary policy to help stimlutate



investment back into the economy and seems to have created atleast some

brief increases in prodcution as early as 2010.

When it comes to fiscal policy Switzerland has developed a firm policy

known as the debt brake rule. This rule which came into place in 2003 as

was created as a way to control debt and to balance the budget. The plan is

a year ahead ceiling that is adjusted cyclically. However there are certain

extraordinary exceptions to the rule. In 2009 parliament passed new

supplementary addition to the debt brake rule that would create an

additional account that could account for fiscal spending during the recession.

The hopes were to amortize this account with the ordinary budget within six

years and to further proceed with the rule.

Switzerland has also passed a series of stimulus packages in order to

help stimulate the economy details from the 2009 and 2010 packages are

listed below in millions of francs (CHF). Overall a total of around 6.2 billion

francs will be spent between 2009-2010 in trying to get Switzerland out of

the recession. One Swiss new provider stated that the majority of the

package will be used in stablizing the job market by focusing on creating

temporary jobs for the unemployed, specialized work in tourism, nature

protection, and youth agencies. Also added were subsidies provided for

heath premiums as well as delaying the addition of a value added tax in

order to help spur consumer spending in the mean time.



(http://www.swissinfo.ch/eng/politics/Government_unveils_new_stimulus_p

ackage.html?cid=980608&rss=true)

The final analysis comes down to how well the policies are working and

whether the government and the SNB need to make even further recommendation

or changes to the economy. As of recently, SECO published a paper stating that the

Swiss economy is stabilizing and is expected to grow at a slow rate in 2010. GDP

was set to grow at around 1.4% which has been raised from prior estimates as well

as estimated decline for forecasted unemployment from 4.9% to 4.3%. However

inflationary pressure rose ever so slightly in March to 103.8 representing a .9%

month to month change. While the worst may be behind us one can never be suer



as the economic data continues to pile in.

Monetary policy is conducted by the Swiss National Bank using the 3 month

Libor Interest Rate. At the onset of the crisis dated August 2007 by (OECD

article) the SNB and ECB were the first to respond by lowering rates by

making repo transactions. Further declines in the economy led to a further

decline in the Libor to spur investment until it final rate today of .25%. The



role of the SNB first is to ensure price stability which with such a low rate

may cause some deflation of prices which is something the SNB will have to

account for in the future.

The SNB also introduced some other policies to help tide the storm such as

extending maturities on repo transactions and communicating to it¶s

participants its desire to lower the LIBOR. And finally to combat the demand

for FRANCS from other countries and to cease a large outflow of it¶s currency

further devaluing it¶s currency it created swap agreement with the Central

Bank of Hungary, National Bank of Poland, and the European Central Bank.

(P.43)

Banks and analysts agreed that threats to the industry persist, predicting massive job losses over the next year and ahalf and larger global banking losses from the deterioration of the U.S. housing market.

UBS AG announced the surprise departure of its chairman and forecast losses and write-downs of approximately $19billion in the first quarter. That puts its write-downs for the past nine months at $37.4 billion -- the most reported by

any bank so far.









Prospects for the Swiss economy in 2009

Thomas Jordan, Member of the Governing Board of the Swiss National Bank

erfa-Gruppe, Weinfelden, 15.01.2009

Complete text in German: Perspektiven für die Schweizer Wirtschaft 2009 PDF [814 KB]

Following a long, strong and broad-based growth phase, the world economy moved into a major recession in mid-

2008. About a year after the beginning of the unprecedented financial market crisis, there was a radical turnaroundin the global economic outlook. The European and Asian economies were not disconnected from the US, as had

been hoped. The Swiss economy leans heavily on its export and financial sectors and faces a difficult year. Arecession appears unavoidable in 2009.

Consequently, the skilful deployment of monetary and fiscal policies as well as optimal conduct on the part of business practitioners in Switzerland are particularly important. Monetary policy can be changed quickly and its

impact is relatively rapid through its influence on interest rates and the exchange rate. The SNB has reactedresolutely to the deterioration in the economic situation and has reduced interest rates to almost zero. If

necessary, monetary policy can be rendered even more expansionary through a series of alternative instruments.

In the case of fiscal policy, the focus is on effective automatic stabilisers ± first and foremost, allowing the

occurrence of temporary budget deficits, together with unemployment benefits and compensation for short-timeworking. In view of the extent and risks of the current crisis, fiscal policy will need to consider and prepare the

deployment of additional stabilisation measures alongside the automatic stabilisers.In addition to the increased focus on economic policy, business practitioners within the Swiss economy are also

challenged. In the case of banks, it is essential that credit shortages for companies and private households beavoided. Moreover, interbank business needs to be strengthened in order to smooth out liquidity imbalances.

Companies must enhance their innovativeness and use opportunities for opening up new markets. The Swisseconomy has many structural strengths and this prompts confidence that Switzerland will overcome the crisis.



The SNB¶s monetary policy strategy consists of three elements. Firstly, the SNB states how it defines price stability.

Secondly, it bases its monetary policy decisions on a medium-term inflation forecast. Thirdly, it sets an operational

target range for its chosen reference interest rate, the three-month Libor.





GDP



GENEVA ² Two of Europe's largest banks, UBS and Deutsche Bank, disclosed Tuesday that they are writing downbillions more in bad investments, reflecting the unrelenting wave of woe from the U.S. subprime crisis.

Banks and analysts agreed that threats to the industry persist, predicting massive job losses over the next year and a

half and larger global banking losses from the deterioration of the U.S. housing market.





its expected first-quarter profit, while Lehman Brothers Holdings Inc. this week was the latest in a string of U.S.-based

banks to seek fresh capital.

UBS, which has already cut more than 1,500 jobs so far, is set to cut more, Chief Executive Marcel Rohner said

Tuesday. He did not say how many.

Ospel, who had indicated earlier that he wanted to stay another year, became the latest victim of the crisis at UBS,which last year ousted its chief executive and other top executives.

"I have always stated that I ultimately take responsibility for the bank's situation," Ospel said in announcing that he

would make way for general counsel Peter Kurer to become chairman.

UBS said that after it raises new capital, its Tier 1 capital ratio, a key indicator of a bank's ability to absorb losses,

would be about 10.6 percent. That is well above minimum European requirements of 4 percent.

The bank said its exposure to U.S. subprime mortgage-related positions fell to approximately $15 billion from $27.6billion on Dec. 31. Its exposure to Alt-A positions -- less risky than subprime loans -- was cut to $16 billion from $26.6

billion, it said.

UBS also said it would create a new unit to "hold certain currently illiquid U.S. real estate assets."

The bank posted a loss of more than $11 billion for the fourth quarter of 2007 after writing down about $13.7 billiontied to U.S. subprime mortgages. It posted a net loss of 4.38 billion francs for 2007, its first annual loss.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

http://www.usatoday.com/money/economy/2008-04-01-404003957_x.htm?csp=34

http://www.swissinfo.ch/eng/business/index/Jobless_rise_prompts_fears_but_no_panic.html?cid=8036

368

http://www.seco.admin.ch/aktuell/00277/01164/01980/index.html?lang=en&msg-id=32249



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