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Philipp Hildebrand stepped down Monday from his post as Swiss National Bank chief after he was unable to prove he did not know that his wife bought some $500,000 in U.S. dollars a few weeks before the SNB decided to set a cap on the Swiss franc.

Michael Buholzer/Reuters/Michael Buholzer/Reuters

Switzerland and Germany have earned reputations as safe spots to invest during Europe's economic crisis, but recent domestic scandals are attracting international attention of a less-desirable nature.

The Swiss have been shaken by allegations of improper foreign exchange trading by former Swiss National Bank chief Philipp Hildebrand, who stepped down on Monday.

Over in Germany, President Christian Wulff is fighting to keep his job after allegedly trying to stop a newspaper from reporting he had taken a personal loan from a businessman's wife during his former job as state premier of Lower Saxony.

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The controversies have put the two neighbours in an uncomfortable position. They are used to being lauded for their stable political and economic climates, despite the spreading debt problems around them. Their roles are well established. Switzerland is the investment haven, while Germany is Europe's rescuer, bailing out its debt-ridden euro zone kin.

"This is definitely a blow to the SNB, because they were seen as a very solid institution," said Arvind Jain, a professor at the John Molson School of Business at Concordia University.

Mr. Hildebrand found himself under fire after his wife bought some $500,000 in U.S. dollars last August, a few weeks before the SNB decided to set a cap on the Swiss franc to keep it from rising further against the euro. The transaction resulted in a profit, which Mr. Hildebrand "rectified" by donating 75,000 Swiss francs to charity in December. In the end, Mr. Hildebrand admitted he couldn't prove he didn't know about his wife's transaction and left his post on Monday.

The incident has exposed some gaps in the SNB's oversight of its leaders. The central bank moved quickly on the weekend to bolster its corporate governance, including examining the regulations for own-account transactions, reviewing all bank transactions by members of its enlarged governing board back to 2009, and requiring approval for foreign exchange transactions over 20,000 francs.

But the affair has created bigger headaches for the Swiss. They have to find a banker who can fill the shoes of Mr. Hildebrand, who was well regarded by his peers at other central banks around the world. Questions linger as well about the SNB's policy toward the Swiss franc, although it has said the peg to the euro remains unchanged.

"Hildebrand was the architect of the peg of the Swiss franc against the euro," said Stephen Isaacs, chairman of the Investment Committee at Alvine Capital in Britain. "It was controversial."

There is also the damage done to Swiss banking secrecy. The saga wouldn't have come to light if an IT worker at Bank Sarasin, where Mr. Hildebrand and his wife were clients, had not disclosed the information to an old school friend. That friend happened to be lawyer as well as a politician for the Swiss People's Party, Mr. Hildebrand's harshest critic, according to Swiss media reports.

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The SNB is not the only area where the Swiss have had to beef up their oversight. They are currently in the process of updating their insider trading rules, which were viewed as "toothless" according to one Swiss newspaper.

The problems in Germany and Switzerland show "weak governance is by no means a monopoly of the European periphery," said Uri Dadush, a senior associate at the Carnegie Endowment.

Nevertheless, Mr. Dadush and other experts don't expect the scandals will frighten investors away, saying they believe the fallout will be limited and won't hurt the economy.

"I don't think investor certainty or investor credibility of either the German or Swiss governments is tarnished in any way by the events that have unfolded," said Adam Meyers, a senior market strategist at Crédit Agricole SA in London.

The move by the SNB to part ways with Mr. Hildebrand so soon after the scandal broke also helps.

"If they move very quickly and put in governance rules about what people can do … if they enforce that, then the reputation will be restored fairly quickly," Mr. Jain said.

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Resolution is slower to come in Germany, where Christian Wulff, who holds the largely ceremonial post of president, is refusing to step down despite calls to do so from some politicians and the media over the loan scandal.

German newspaper Handelsblatt said Mr. Wulff could learn something from Mr. Hildebrand's departure. So far, German Chancellor Angela Merkel is sticking by him.

Some experts characterize the German uproar as a "tempest in a teapot." But others believe it could lead to further political turmoil, with some media commentators wondering whether Ms. Merkel's coalition could eventually collapse.

"[Mr.]Wulff's credibility needs to be clarified since he could yet do damage to the credibility of the coalition and this would then become a market event," Jane Foley, a senior currency strategist at Rabobank in London, wrote in an e-mail.

Special to The Globe and Mail

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