With a robust economy, stable government and low public debt, Switzerland boasts the ingredients to make its heavily indebted neighbors turn green with envy. However, these virtues have attracted the unwanted attention of investors seeking a safe haven, sending the Swiss franc to records against major currencies that are now threatening the country’s export-oriented economy.
Is the Swiss franc really worth its weight in gold?
“It’s overvalued by far. Just looking at the interest rate differentials, people are losing about 1.5 percent interest each year just to know their money is safe in the franc,” Credit Suisse Group AG economist Claude Maurer said. “The only reason to buy the Swiss franc is risk aversion.”
Jan-Egbert Sturm, who heads the ETH Zurich’s KOF Swiss Economic Institute, said people are simply putting money in the franc because “the other candidates are more likely to have some kind of a default problem.”
“Investors are accepting the higher insurance premium. If you see a hurricane coming ... you’re willing to pay a higher insurance premium to insure it,” Julius Baer Group AG chief strategist Christian Gattiker said.
Nevertheless, “it is a pricey hedge,” Gattiker added.
Paradoxically, investors’ faith in the franc may turn out to be it and the solid Swiss economy’s undoing.
“The pressure on Switzerland is rising and rising. If you look at exports they have now turned negative,” Sturm said.
The franc has gained about 30 percent against the euro and nearly 40 percent against the US dollar since a year ago. The strong currency has started to bite hard into the earnings of Swiss companies — many count the EU and the US among their biggest customers.
Pharmaceutical giant F. Hoffmann-La Roche Ltd blamed the strong franc for its 5 percent drop in second-quarter earnings, while Credit Suisse said the exchange rate took millions off its pre-tax profits.
Swatch boss Nick Hayek urged the Swiss central bank to fight the rise of the franc, saying that “we must defend ourselves.”
On Wednesday, the central bank itself said that the franc was now “massively overvalued” and threatening the Swiss economy, and took measures to try to lower its value.
As the global economic outlook is also weak, “the outlook for the Swiss economy has deteriorated substantially,” it said.
However, while the move has halted an appreciation to SF1.10 to the euro, it has not been able to drive it significantly lower.
Arturo Bris of the IMD business school, said that if “the European situation doesn’t improve, then it’s going to be dramatic for Switzerland in the long run.”
What would take the glint off the franc is perhaps an economic slowdown in Switzerland, some analysts said.
“What would work ironically in favor of the SNB [Swiss National Bank] is the increasing recession risk for the Swiss economy in 2012,” Gattiker said.
However, Gattiker is not optimistic that the currency would lose steam dramatically.
“I don’t think we’re going into the old trading rates of 1.40, 1.60 [against the euro]. Ten to 20 years down the road we’re more probably going to be in the 90 cents to SF1.10 range,” he said.
Commerzbank AG analysts also believe that the franc would stabilize at a level of about SF1.10 against the euro.
“Uncertainty remains elevated on the market and there is no sign of tensions easing in the eurozone debt crisis. Moreover, the markets are concerned about the US economy. Demand for the Swiss franc ... should remain elevated,” they said.