Identifier
Created
Classification
Origin
09BERN23
2009-01-13 10:18:00
UNCLASSIFIED
Embassy Bern
Cable title:  

UPDATE OF SWISS RESPONSE TO FINANCIAL CRISIS

Tags:  EFIN ECON SZ 
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VZCZCXYZ0000
RR RUEHWEB

DE RUEHSW #0023/01 0131018
ZNR UUUUU ZZH
R 131018Z JAN 09
FM AMEMBASSY BERN
TO SECSTATE WASHDC 5599
UNCLAS BERN 000023 

SIPDIS

DEPT FOR EEB/IFD/OMA AND EEB/EPPD

E.O. 12958: N/A
TAGS: EFIN ECON SZ
SUBJECT: UPDATE OF SWISS RESPONSE TO FINANCIAL CRISIS

REF: A. BERN 544

B. BERN 546

C. BERN 552

D. EMAIL L.FRERIKSEN/J.KESSLER RE: ECONOMIC MATRIX
INPUT 10/23/08

UNCLAS BERN 000023

SIPDIS

DEPT FOR EEB/IFD/OMA AND EEB/EPPD

E.O. 12958: N/A
TAGS: EFIN ECON SZ
SUBJECT: UPDATE OF SWISS RESPONSE TO FINANCIAL CRISIS

REF: A. BERN 544

B. BERN 546

C. BERN 552

D. EMAIL L.FRERIKSEN/J.KESSLER RE: ECONOMIC MATRIX
INPUT 10/23/08


1. Summary. Switzerland's economic outlook has steadily
declined over the past three months with negative growth
forecasts, increased unemployment, and industrial sectors
starting to show the signs of stress. Despite the economic
downturn, bank lending practices have not been impacted. The
GOS has taken several actions to stem the recent economic and
financial downturn, including a relaxation of monetary
policy, and implementation of its UBS rescue package (Ref A).
Following a public initiative, the GOS will further regulate
bank executive salaries. The GOS restructured capital and
leverage ratio regulations and is in the process of
introducing liquidity ratio regulations to lessen the impact
of future financial downturns. End Summary.

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Economic Outlook Deteriorates
--------------


2. The Swiss outlook and economic projections have steadily
declined over the past three months. The GOS altered growth
forecasts from a marked slowdown with very low growth in 2009
to a forecast of negative 0.8 percent GDP growth for all of

2009. With the exception of consumption, all demand
components are expected to decline. The KOF Swiss Economic
Institute's economic growth barometer, which measures the
economy's likely performance for the next six months, reached
a five year low. Unemployment rates climbed from 2.5 percent
in October to 2.7 percent in November and to 3.0 percent in
December, and is expected to rise further to near 4.0 percent
by late 2009. Many industry sectors are beginning to show
signs of the economic crisis, although a few sectors are
still posting positive sales.


3. Lending practices continue to hold in Switzerland. The
Swiss National Bank (SNB) conducted regular surveys of 20
major Swiss banks to follow lending patterns. The SNB
reports that in the vast majority of institutions surveyed,
no lending restrictions were announced in the third quarter
of 2008. Only 15 percent of banks reported that lending
practices had become slightly more restrictive.


4. While the SNB continues to monitor the economic outlook,
SNB officials and State Secretary for Economic Affairs Jean
Daniel Gerber cautioned through press releases that it is

hard to predict the impact of the financial crisis on
Switzerland until there is greater certainty regarding the
U.S. economy.

--------------
Relaxation of Monetary Policy
--------------


5. Since reftel reporting on the financial crisis, the GOS
continues to react to an increasingly negative economic
outlook, even though it has not been as severely impacted as
other advanced economies. The SNB mirrored the U.S. Federal
Reserve Bank by further relaxing its monetary policy several
times over the previous three months. SNB lowered the
interest rate 50 basis points on November 6, 100 basis points
on November 20, and 50 basis points on December 11 resulting
in a current interest rate of 0.5% and a decrease of the
target range for the three month Libor to 0 to 1 percent.


6. According to SNB Governing Board Chairman Jean-Pierre
Roth, the reasons behind the monetary policy rest on three
factors: 1) the international economic outlook deteriorated
markedly, which negatively impacted forecasts for the Swiss
economy; 2) the financial market crisis intensified; and 3)
prices for raw materials and oil plummeted, which combined
with the worsening economic outlook, led to a marked
improvement in inflation and maneuvering room for the SNB.

--------------
Economic Stimulus Packages Announced
--------------


7. On November 12, the Federal Council announced the first
economic stimulus package following the downward revisions of
economic forecasts. The package envisioned to boost economic
activity and employment involves an infusion of up to Sfr 1.5
billion ($1.2 billion) (0.2 percent of 2008 GDP). Immediate
measures included Sfr 66 million to move natural hazard
management projects forward, Sfr 20 million for federal civil
construction projects, and Sfr45 million for residential
construction. The GOS plans to lift a freeze on credits
totaling Sfr205 million in January 2009, which will be
directed toward transportation, education, farming and
defense. Lastly, the GOS will pay back funds set aside as a
crisis reserve paid into by 650 companies totaling Sfr550
million.


8. On December 21, the GOS announced a second stimulus
package totaling Sfr650 million ($590 million). The package
will be implemented in Spring 2009. Details regarding the
use of the money have not been provided. The GOS has already
indicated that a third stimulus package may be necessary if
Switzerland does not recover by 2010.

--------------
Financial Crisis Impact on Swiss Banks
--------------


9. As reported in ref A, the GOS provided UBS, Switzerland's
largest bank, a $60 billion rescue package that has been
approved by Parliament. The SNB has now created a special
purpose vehicle, the SNB StabFund, to acquire the illiquid
assets of UBS. The first tranche of assets was acquired on
December 16, whereby UBS transferred slightly over 2000
securities positions worth $16.4 billion. The majority of
the assets were US and European residential and commercial
mortgage backed securities. Speculation regarding further
massive write-offs by UBS in the fourth quarter of 2008 lead
to a 5 percent drop in UBS' stock on January 12, 2009.


10. CreditSuisse, Switzerland's second largest bank,
avoided government intervention by boosting its capital Sfr10
billion through private investors. The capital infusion
proved priceless when CreditSuisse needed to write off Sfr3
billion in losses in the fourth quarter of 2008.

--------------
Executive Bonuses at Risk
--------------


11. UBS executives voluntarily agreed to forgo their bonuses
following UBS' request for GOS assistance and the bank's
massive write-offs. In November, UBS former Chief Executive
Peter Wuffli said he would forgo his Sfr12 million bonus.
Following suit, former Chairman Marcel Ospel, Vice-President
Stephan Haeringer and former Finance Chief Marco Sutor agreed
to waive their bonuses worth Sfr 33 million. UBS announced a
revised bonus structure so that future bonuses will be paid
only upon reaching long-term results.


12. Regardless of UBS' new bonus system, a general outcry
from the public for the government to restrict CEO bonuses
continues to support the popular initiative "Against fat-cat
salaries", which was submitted to the government on February
26, 2008. The initiative would outlaw golden parachutes,
golden handshakes, and bonuses, and require the annual
general meeting to vote on total pay awarded to executives.
On December 5, the Federal Council responded to the
initiative by issuing a comprehensive bill revising the
company and accounting law as an indirect counter-proposal.
The bill is more moderate that the public initiative. The
Federal Council requested parliament approval of its bill
over the initiative. According to the Federal Council, its
revisions would "result in balance between the various
governing and executive bodies in a company, create
sufficient transparency in the pay packages awarded to top
managers, as well as in internal processes, and instigate
measures to secure the position of shareholders as the
company's owners." The bill provides greater protection to
shareholders' assets by requiring fees paid to directors to
be approved at the company's annual general meeting.

--------------
Lessons Learned: New Regulations
--------------


13. SNB's Governing Board Vice Chairman Philipp Hildebrand
commented that the "financial system needs to be more
resilient to possible shocks." The SNB has focused on the
need to improve the "shock absorbers": capital and liquidity
by implementing regulatory reforms. According to Hildebrand,
both of the regulatory measures are in line with proposals
made by the Financial Stability and the G20 action plan, a
well as the strategy of the Basel Committee on Banking
Supervision for implementing lessons from the crisis. He
noted that the regulations are intended to supplement Basel
II, not to replace it.


14. New Capital Adequacy Regulation: The Swiss Federal
Banking Commission's reform of the capital adequacy
regulation for big banks is designed to increase
risk-weighted capital together with the introduction of a
leverage ratio. The regulation will require big banks to
increase risk-weighted capital. During upswings, banks will
be required to considerably exceed the minimum requirements
for capital and leverage ratios to ensure a buffer exists to
absorb losses during crises. Banks will not be required to
comply with the higher risk-weighted capital ratio and
leverage ratio until 2013 to allow the banks to recover from
the current crisis before implementation.


15. Liquidity Ratio: New regulations are in the process of
being drafted to address inadequate liquidity. According to
Hildebrand, the two big Swiss banks were hit particularly
hard by the financial crisis to a large extent as a
consequence of their extraordinarily high leverage.
De-leveraging amplified the shocks to the financial system.
The objective of the new regulation is "to obtain higher
liquidity buffers that better reflect the great complexity of
liquidity risks. When calculating liquidity requirements for
various crisis scenarios, the authorities use internal model
calculations by the banks. In order to ensure the
comparability and transparency of the internal calculations,
the new regime foresees certain standardisations." The
conclusion of the project is scheduled for early 2009.

--------------
Comment
--------------


16. Although Switzerland has not yet been effected by the
global financial crisis and economic slowdown to the same
degree as other advanced economies, the GOS is taking every
measure to lessen the eventual impact. With the majority of
Swiss exports and imports reliant on the EU and US markets,
the GOS will continue to monitor these economies closely and
likely adjust internal regulations and stimulus packages in
response to any further deterioration in either economy.
CARTER