March 8, 2021

Switzerland Takes Surprise Action to Weaken the Franc

Declaring their currency “massively overvalued,” the Swiss National Bank cut its key interest rate target, and said it would raise the supply of liquidity to the Swiss franc money market in the next few days in a bid to weaken the franc.

An avalanche of dollars and euros has been tumbling into this Alpine outpost at record rates, as investors see the franc as a haven from the twin debt crises in the United States and Europe. But its resulting strength risks undermining economic growth in Switzerland and stoking inflation, the central bank said.

“The franc is like the new gold,” said a Geneva banker who would give only his first name, Dmitri, insisting on the discretion that is the hallmark of this reserved nation. “It’s crazy and it’s all anyone is talking about, in the morning, at lunch, at dinner parties.”

It was certainly Topic A at the noon lunch hour, where Dmitri and other dark-suited bankers had emerged from the doors of Credit Suisse, UBS, Goldman Sachs and many other wealthy banks to perch near the broad expanse of Lake Geneva to chew on grilled fish and the issues of the day.

Switzerland is vaunted as a country that attracts money for its secretive bank accounts and the less savory business of tax evasion. But it is also the home of “le franc fort,” a muscular currency long seen as second perhaps only to the dollar because this nation — unlike some others — tends to have its finances in order.

Now the Swiss franc is  second no more.

Despite the passage at long last of a Washington deal to lift America’s debt ceiling, the dollar has plunged to record lows against the Swiss franc on fears the American economy will slow further. It was trading at 77 Swiss centimes Wednesday, down about a third from the level of a year ago.

The euro has fared little better. As Europe succumbed to its own debt troubles last year, the franc took off against the euro. Now, as the latest European bailout for Greece fails to shield big countries like Italy and Spain from the credit contagion, one euro buys 1.11 Swiss francs — far less than the 1.38 francs it was worth a year ago.

With the rest of the world so untidy, Switzerland looks pristine. Despite a generous safety net, this tiny nation does not have other onerous expenses, like a big military. Its current account surplus is an enviable 15 percent of gross domestic product, and it has low debt. The economy grew 2.6 percent last year; unemployment is around 3 percent.

Still, while it’s easy for Switzerland to lure other people’s money, there may be such a thing as too much of it. Even for the Swiss.

The Swiss central bank sought to tamp down demand on Wednesday by narrowing its target band for a key rate, the 3-month Libor, to 0.00-0.25 percent from 0.00-0.75 percent to fight the franc’s appreciation.

Authorities declared they “won’t tolerate” a “tightening of monetary conditions,” and would take further steps as necessary to curb the franc’s rise.

The cost of fine Swiss-made goods, from watches to precision machinery, has gone from eye-popping to eye-watering, and Swiss companies are warning of peril.

“This is bad for the Swiss economy,” said Thomas Christen, the chief executive of Lucerne-based Reed Electronics, who has started buying cheaper materials to offset his costs.

Everything from a cup of coffee to a Swiss Alpine ski vacation has been priced to the stretching point or beyond reach for many tourists.

Mark Tompkins and Serena Koenig of Boston were stunned during a recent visit. “A mixed drink at an average bar,” Mr. Tompkins said, “was 18 to 20 Swiss francs” — $23 to $25 — “so two rounds of drinks for four people was crazy expensive.”

In downtown Geneva, where a phalanx of regal storefronts glitter with diamonds and gold, Jean Loichot said his business from Americans and Europeans had slowed to a trickle.

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