The Telegraph’s Ambrose Evans Pritchard is a little worried about Switzerland. Specifically about the prospect of imminent deflation. As he writes on Monday:
Watch Switzerland closely. It is tipping into deflation, the first Western country to succumb to Japan’s disease. “This is something that we must prevent at all costs. The current situation is extraordinarily serious,” said Philipp Hildebrand, a governor of the Swiss National Bank. The SNB is not easily spooked. It is the world’s benchmark bank, the keeper of the monetary flame.
Yet even the SNB’s hard men have thrown away the rule book, taking emergency action to force down the exchange rate of the Swiss franc. Here lies the danger. If other countries try to export deflation by this means, we will face a second phase of the global crisis. Taiwan is already devaluing. Korea, Singapore, and Sweden all seem tempted to follow. Japan is chomping at the bit. “We don’t fully realise in the West what a catastrophic collapse Japan has suffered,” says Albert Edwards, global strategist at Societe Generale. “The West has dumped a large part of its economic downturn onto Japan by devaluing against the yen.”
He goes on:
Many countries toying with devaluation are exporters with surpluses — 15.4 percent of GDP for Singapore, 8.4 percent for Switzerland, and 6.1 percent for China. If these countries refuse to let their imbalances correct, world demand must implode. Mr Hildebrand denies that the SNB is pursuing a “beggar-thy-neighbour’ strategy. Like the yen, the franc suffers from the safe-haven curse: Everybody buys it in a storm. This tightens monetary conditions. The SNB cannot easily offset this. It has already cut interest rates to near zero. There are not enough Swiss government bonds in the market to rely on the sort of “QE” asset purchases being carried out by the Bank. Ultimately, I suspect this crisis may mark the moment when the Swiss franc loses its safe-haven role. Credit default swaps (CDS) measuring risk on five-year government debt have reached 127 for Switzerland, higher than Britain at 118. Norway has the world’s lowest CDS at 48, reflecting its status as a petro-democracy. Switzerland’s banks are over-leveraged. Loans to emerging markets equal 50 percent of GDP (half to Eastern Europe).
Add to all that the pressure befalling Switzerland from the global G20 inspired crackdown on tax friendly states, and it’s no surprise some are warning the country could be headed for a year of economic stagnation.
As SNB board member Thomas Jordan told Swiss newspaper NZZ am Sonntag on Monday:
‘The situation is without doubt serious. A decline of 2.5 to 3 percent in the GDP would be the sharpest contraction of the Swiss economy since 1975,’ Jordan said.
‘We assume that a turning point in the economic dynamic could be reached during next year at the earliest. But it is entirely possible that 2010 as a whole will be a year of economic stagnation,’ he said.
The comments from Jordan follow the biggest annual drop in Swiss consumer prices in almost 50 years and the first overall drop in five years. The figures for March released last Friday showed consumer prices dropped 0.4 per cent from a year ago and were 0.3 per cent lower than the previous month.
Of course, while the Swiss franc’s fall versus the euro on Monday to its lowest in two weeks will be welcomed by the SNB for providing competitive advantage for the country’s exports – the risk for Switzerland ultimately will be the franc losing its safe-haven role forever.
Related links:
A financial black hole in Geneva – FT Alphaville
The Swiss franc factor - FT Alphaville
Swiss franc intervention – Short View
Swiss stoke fears of currency wars - FT
On your marks, get set, devalue – FT Alphaville
Swiss struggles – FT Alphaville