Across Europe, government deficits are rising, and debt spiralling is upward – except in one place.
While its neighbours grapple with sovereign downgrades, rising yields on government debt and surging unemployment, Switzerland, the non-European Union country at the heart of the continent, is a glaring exception.
The country's triple-A credit rating remains undented, government debt is going down, interest rates have dropped to near historic lows and prices are falling. But still, the Swiss are worrying.
Since the euro zone crisis began, foreign money has flooded into Switzerland, a traditional haven, forcing the Swiss National Bank in September to set a floor of 1.20 Swiss francs ($1.31) against the euro in order to rein in the strength of the franc.
Even with the floor in place, the SNB admits the franc is "still high." Exporters, hoteliers and retailers have howled as the strong currency has hurt sales. Hotel bookings have plunged and look set to drop further in the winter season as foreign tourists stay away. Retailers have seen shoppers defecting across the border and exporters say they have only retained market share by slashing margins or even selling at a loss.
Many are looking to Thursday's governors' meeting of the SNB for relief. The central bank could decide to raise the floor for the franc against the euro, in an attempt to limit the negative fallout from Switzerland's haven status.
But in the meantime, the outlook for growth has darkened. Weakening euro zone demand and the currency's strength have prompted forecasts for gross domestic product to be revised down for this year and next.
The SNB in September cut its 2011 GDP forecast to 1.5 to 2 per cent, compared with 2.7 per cent for 2010. Credit Suisse, the bank, expects growth next year of a paltry 0.5 per cent.
Some traders expect the central bank could raise the euro-Swiss franc floor to 1.25 Swiss francs, or even 1.30, in response to the clamour for help. Politicians have even discussed extraordinary steps such as negative interest rates or limited capital controls.
The SNB stresses that its aim is price stability, not macroeconomic management. But even that measure may force action. Consumer prices fell 0.1 per cent year-on-year in October – the first decline in two years. The downward trend accelerated last month, with prices falling a higher-than-expected 0.5 per cent compared with the previous year.
Such data suggest that the SNB's September forecast for inflation of 0.4 per cent this year and price falls of 0.3 per cent in 2012 is outdated and further action inevitable.
"The SNB will revise down its inflation forecast markedly," says Michael Saunders of Citigroup.
Yet the picture is not uniformly gloomy. While exporters are suffering, some markets and sectors are still thriving. Demand from Asia remains buoyant. Swiss watch exports, a core sector for jobs and wealth, have broken one record after another this year. And although unemployment has edged upward, it is still low compared with other European countries. Employers remain reluctant to cut jobs, seeking alternatives such as longer hours for the same pay. In some sectors, producers say they would hire more if they could find the skilled labour.
State finances look poised to improve, despite the gloom. The government expects a 1.4 billion Swiss franc federal surplus next year. That will allow Bern to redeem 600 million francs more in long-term debt than it issues. Borrowing costs have dropped so low that investors accept negative yields for the security of holding Swiss paper. The latest 10-year Swiss government bond pays 0.7 per cent – much less than prosperous Germany.
"People are looking for security at almost any price. Demand has been much higher recently than in the past and, since August, short-term rates have even turned negative," says Urs Eggenberger, head of the Swiss federal treasury.
Next year should bring a continuation of the steady downward trend in borrowing of the past decade, during which debt fell from 130 billion francs in 2001 to an estimated 110 billion francs this year. Federal debt now represents 19.5 per cent of GDP, while total state debt, including cantons, communes and the social security system, is just 36.4 per cent of GDP – a figure most of Switzerland's neighbours can only dream of.
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