Swiss unions demonstrated at UBS and Credit Suisse in October demanding that managers who had received bonuses repay them. (Arnd Wiegmann/Reuters)

Switzerland pays price for isolationism

By Joshua Gallu, James G. Neuger and Simone Meier Bloomberg News

Published: December 1, 2008

E-Mail Article

Printer-Friendly

3-Column Format

Translate

Text Size

ZURICH: An isolated European country with an economy geared toward finance and winter sports loses its status as a monetary bastion as credit evaporates around the globe. Banks teeter, the once-impregnable currency depreciates and a proudly independent people question whether a centuries-old go-it-alone strategy can survive.

Even Switzerland is wondering whether it is immune to the forces ravaging Iceland.

The tumult playing out in Iceland, whose economy the International Monetary Fund says may shrink about 10 percent next year, offers a cautionary tale for the no less fiercely independent Swiss. While they are in far better shape, their status as a custodian of the world's wealth is under threat by a global economic upheaval they cannot control and miscues by the banks that made them great.

"The Swiss model of isolationism is not an advantage" in the current environment, said Michael Baer, the great-grandson of Julius Baer, founder of the largest independent wealth management firm in the country. "Switzerland is absolutely not immune to global developments, especially not as regards the financial crisis and the economy."

For the 7.6 million Swiss, signs of stress are evident in a global market upheaval that has given them reasons to doubt a splendid isolation dating back to medieval times.

While the Swiss market index has outperformed the Nasdaq composite index this year, it has still lost 31 percent of its value. UBS, the flagship Swiss bank, amassed the biggest losses in Europe in the credit crunch, forcing the government and central bank to offer $59 billion in support. The Swiss franc has tumbled against the dollar. And the banking secrecy that attracts offshore wealth to Switzerland is drawing more fire than ever.

Slowly, the pain in Zurich is trickling across the country.

The Swiss economy will shrink 0.2 percent next year after expanding 1.9 percent in 2008, the Organization for Economic Cooperation and Development said on Nov. 25. Manufacturing in November contracted the most since at least 1995, according to a report released on Monday.

UBS and Credit Suisse, the No.2 Swiss bank, whose combined balance sheets equal seven times the Swiss gross domestic product, were once a calling card for Swiss economic power; now they are hurting.

UBS shares have fallen 67 percent this year. Credit Suisse, reeling from a loss of 1.3 billion Swiss francs, or $1.1 billion, in the third quarter, opted out of Swiss government aid, raising 10 billion francs from investors including Qatar Holding and Koor Industries, which is based in Tel Aviv.

This added to concerns that control of the country's banks is moving out of Swiss hands.

"I think we will see a move to more protectionism," Baer said. "If the crisis lasts longer and the real economy cools further, we will soon see social problems, strikes, unrest."

A grass-roots backlash is already under way. Protesters barricaded UBS's private-banking branch in Zurich in October, demanding that executives pay back bonuses. A banner at another demonstration labeled the bank "United Bandits of Switzerland."

The greatest menace may be a series of investigations in the United States that puts the Swiss tradition of banking secrecy at risk.

A former UBS banker, Bradley Birkenfeld, in June admitted to helping American clients hide $20 billion and dodge taxes. On Nov. 6, a grand jury in Fort Lauderdale, Florida, indicted Raoul Weil, chairman of global wealth management at UBS in Zurich, on a charge of conspiring to help 20,000 wealthy Americans stash assets out of sight of the Internal Revenue Service, the U.S. tax collection agency. Weil, whom the bank is replacing on an interim basis, denies the charge.

Meanwhile, the German finance minister, Peer Steinbrück, is pressing for Switzerland to be added to a blacklist of tax havens being prepared by the Organization for Economic Cooperation and Development.

The Swiss franc, long seen as a haven in the world's financial riptides, is increasingly being swept up in them. The currency, which reached 0.9638 per dollar on March 17 - the strongest since at least 1971 - has since fallen to 1.2140, and it will not recover through 2009, according to the median of 48 analyst forecasts compiled by Bloomberg. And the Swiss National Bank is running out of ammunition to buoy currency and the economy.

The central bank has cut its main interest rate three times since early October to 1 percent. Since Oct. 20, the bank has been forced to team up with the European Central Bank to supply francs to borrowers outside Switzerland in an effort to bring three-month rates in line with its target.

As pressures grow, two paths lie open for the country. One is to turn inward, which is a temptation in a country that did not join the United Nations until 2002. The other is to embrace the wider world by becoming a member of the European Union.