2010 Article IV Consultation: Staff Report; Public Information Notice on the Executive Board Discussion; Statement by the Executive Director for Switzerland, and Informational Annex

Switzerland was hard hit by the global crisis; however, the 1.5 percent contraction in 2009 compares favorably with most industrial countries. This 2010 Article IV Consultation highlights that after a year-long decline in real GDP, the economy exited the recession in mid-2009. In response to the crisis, the authorities took a series of actions in a broad range of policy areas. Financial sector measures also helped to stabilize financial markets and reduce systemic risk. The authorities are now contemplating how to exit from the current accommodative stance.


Switzerland was hard hit by the global crisis; however, the 1.5 percent contraction in 2009 compares favorably with most industrial countries. This 2010 Article IV Consultation highlights that after a year-long decline in real GDP, the economy exited the recession in mid-2009. In response to the crisis, the authorities took a series of actions in a broad range of policy areas. Financial sector measures also helped to stabilize financial markets and reduce systemic risk. The authorities are now contemplating how to exit from the current accommodative stance.

I. Executive Summary and Staff Appraisal

1. A recovery is ongoing. While domestic demand helped cushion the effects of the trade and financial shocks in the downturn, the economy is now benefitting from the pick-up in world growth and stabilization in financial markets. Latest indicators point to a continuing recovery and GDP is expected to grow by about 1½ percent in 2010 with a further strengthening in 2011 (Figure 1). With substantial slack, and Swiss franc appreciation, inflation should remain muted. However, uncertainties related to global developments are large. Similarly, the medium term prospects of the economy are uncertain, as financial activity and immigration flows—two key drivers of recent growth—may slow down going forward. Given uncertainties and in the absence of near-term threats to price and public finance stability, an exit from the current accommodative fiscal and monetary stance should be cautious.

Figure 1.
Figure 1.

Switzerland: Developments and Outlook

(Year-on-year growth rates in percent, unless otherwise indicated)

Citation: IMF Staff Country Reports 2010, 140; 10.5089/9781455205899.002.A001

Sources: SNB; SECO; and IMF staff estimates.

2. The challenge for monetary policy is to normalize interest rates, while exiting exchange rate interventions. The SNB has appropriately applied an expansionary monetary stance with unconventional policies, given deflation risks and zero interest rates. With an improving outlook and concerns over accelerating mortgage credit, the authorities have signaled a desire to normalize interest rates over time. There is, however, considerable uncertainty at this stage, and an inherent tension between appreciation pressures and the desire to raise interest rates.

  • The real appreciation reflects continuing trade surpluses, improving growth prospects, and safe haven effects, but model based assessments indicate that the Swiss franc is broadly in line with fundamentals. In this context, the authorities’ intentions to return over time to a free floating currency regime are welcome, and interventions, if any, should be limited to resisting short-term disruptive pressures.

  • Interest rates should not be raised too early—or without regard to a fundamental strengthening in the currency. Indeed, inflationary pressures are subdued and the long established credibility of the SNB limits the possibility of de-anchoring of expectations. Furthermore, while there is no indication so far that lending standards have materially deteriorated, supervisory/prudential tools (e.g., loan to value restrictions, added capital charges under Pillar II) may be best suited to address these risks if they materialize.

3. Fiscal consolidation should be limited to what is needed to respect the debt brake rule, while giving more attention to longer term issues. In spite of the recession and of stimulus measures of around ¾ percent of GDP in 2009 and 2010, the small surplus in 2009 is expected to only turn to a limited deficit in 2010. To comply with the debt brake rule, some consolidation is being contemplated for 2011-13. Prudent fiscal policies resulting in low debt levels have served the country well and are warranted, given large potential liabilities related to the banking sector and ageing effects. Still, consistent underestimate of revenue suggests an increase in potential revenues and points to a possible lesser need of fiscal retrenchment in the short run. Reforms are needed, however, to address the medium term sustainability gap.

4. The momentum to reinforce financial stability should not be lost. The authorities’ package of measures has helped to stabilize the financial system but also exposed the size of contingent liabilities faced by public finances, and the moral hazard problem associated with the presence of a limited number of systemic banks. It is therefore essential that the ongoing strengthening of supervisory and regulatory frameworks continues.

5. Risks remain and warrant close monitoring. Although the two largest banks have strengthened funding and capital positions, their dependence on wholesale funding remains elevated and further asset deterioration cannot be ruled out. Turbulences in the Euro area would be a particular concern—through spillovers to the Swiss banks and economy. Moreover, tax amnesties in third countries are putting some pressures on the wealth management and private banking industry, as may the welcome full acceptance of article 26 of the OECD model tax convention by the authorities. In the insurance sector, some life insurance companies and a re-insurer have been weakened by market developments. While coverage ratios in the second pillar pension sector have picked up to some degree, underfunding remains and may require adjustment.

6. Although the authorities’ steps to strengthen supervision are welcome, more needs to be done. The supervisory focus on major institutions, oversight of auditors, attention to governance and risk management practices, and cross-border cooperation have improved. The effectiveness of FINMA could be further enhanced. Its in-house supervisory capability should be expanded, thus allowing it to engage more actively on-site with high impact institutions. The independence of the external auditors carrying out on-site supervision could be strengthened, inter alia by having payments to auditors come directly from FINMA. This will clarify lines of control and reinforce the auditors’ public responsibilities.

7. Building on prior initiatives, the authorities should reinforce their regulatory framework to address the “Too big to fail” (TBTF) problem. Early appropriate measures taken by FINMA include imposing higher capital requirements effective in 2013, the recent development of liquidity benchmarks for the two large banks, and issuance of remuneration guidelines effective from 2010. The report issued by the advisory working group on the TBTF problem identifies a series of possible measures. Once new Basel standards have been issued, the authorities should implement them, and include sufficient add-ons for institutions posing a systemic risk, in order to effectively address moral hazard and to discourage excessive risk taking. Simplifications in the organization and the legal structure of large banking institutions could also be considered to help improve crisis resolution. This may require additional legislation. Progress in these areas will serve the economy well and help foster the reputation of its financial center.

8. Development of an effective macro-prudential framework will require clarity on responsibilities, access to information, and enforcement power. According to their mandates, the SNB contributes to the stability of the financial system while FINMA secures the smooth functioning of the financial markets. While some overlap between micro and macro supervision is an inherent feature of the system given the weight of the two large banks, the delineation of responsibilities between the two institutions could be further clarified. The new SNB/FINMA Memorandum of Understanding is a step in the right direction. There is also a need to ensure that the legal framework is supportive of the respective mandates, with the powers of each institution closely aligned with its mandate, including as regards to information gathering, and enables the findings to be acted upon.

II. Context: Switzerland has Weathered the Global Downturn Relatively Well

9. The economic contraction in 2009 has been shallower than in most industrial countries (Figure 2). The economy exited a year-long recession in the second half of 2009, as the decline in exports abated, and the fall in financial intermediation and manufacturing bottomed out. Overall, GDP contraction in 2009, at -1.5 percent, compared favorably with neighboring countries. At first blush, this was somewhat unexpected given the trade and financial sector origins of the shock, and the structure of the Swiss economy. However, the economy’s resilience can be linked to strong fundamentals going into the recession and to supportive macro and financial policies. Overall, while export oriented activities have been significantly hit by the trade and financial sector shock, domestic oriented ones have been more resilient.

Figure 2.
Figure 2.

Switzerland: Comparative Economic Performance, 1995-2009

Citation: IMF Staff Country Reports 2010, 140; 10.5089/9781455205899.002.A001

Source: WEO.

Sectoral value added reflected external shocks.

Citation: IMF Staff Country Reports 2010, 140; 10.5089/9781455205899.002.A001

Switzerland: Contributions to Growth

article image
Source: SECO and staff estimates.

A. The Trade and Financial Shocks Strongly hit the Economy

10. Manufacturing exports and production declined sharply with the drop in external demand, but picked up in the second half of the year, in line with the global recovery. Overall, the negative 3 percent contribution of trade to GDP growth in 2009 is a reflection of its positive contributions in the years preceding the crisis.


Countries which previously benefited from an expansion in trade experienced a larger decline when it collapsed.

Citation: IMF Staff Country Reports 2010, 140; 10.5089/9781455205899.002.A001

Source: WTO.

11. In this context, industrial production fell by about 19 percent from its peak to its trough, before recovering by about 8 percent in the latter half of 2009. While part of Swiss manufacturing production partly consists of goods that are little affected by the cycle (pharmaceuticals and food), a sizable portion is heavily concentrated in the production of capital and intermediary consumption goods—which were more strongly impacted by the collapse in world trade. Capacity utilization reflected these developments–standing at 76 percent, 6 percentage points below its long-run average, at end-2009.


The sharp fall off in industrial production has turned around.

Citation: IMF Staff Country Reports 2010, 140; 10.5089/9781455205899.002.A001

Source: Haver; and staff estimates.

12. The crisis also had a major effect on financial intermediation value added, and on the current account.

  • The contraction in financial intermediation was much larger than the declines experienced during the mid-1990s and early 2000 recessions.1 Value added from this activity declined by close to 25 percent (or by some 3 percent of GDP) due to the crisis, before recovering somewhat by the end of the year.

  • Losses and write-downs of the large banks occurred in foreign subsidiaries and had a strong impact on the current account.2 The 2008 current account surplus was revised downward—from 10 to 2 percent of GDP—in August 2009, once the extent of the financial losses became clear (Figure 3; Table 2). Direct investment income fell from SFr 60 to 8 billion causing the net investment income to move into deficit for the first time ever. The trade balance, however, was in record surplus. With regard to 2009, the current account surplus is projected to have increased to about 9 percent of GDP, as the trade and service surplus continues to expand, and the net investment income moves back to balance.

Figure 3.
Figure 3.

Switzerland: External Developments

Citation: IMF Staff Country Reports 2010, 140; 10.5089/9781455205899.002.A001

Sources: Swiss National Bank; WTO; and IMF staff estimates.
Table 1.

Switzerland: Basic Data

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Sources: IMF, World Economic Outlook database; Swiss National Bank; and Swiss Institute for Business Cycle Research.

Fund staff estimates and projections unless otherwise noted.

Change as percent of previous year’s GDP.

2009 values as of March 3, 2010.

Based on relative consumer prices.

Table 2.

Switzerland: Balance of Payments, 2007–15 1/

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Sources: IMF, World Economic Outlook database; and Swiss National Bank.

Fund staff estimates and projections unless otherwise noted.

Includes errors and omissions.

Official reserves for 2010 are as of end-March 2010.


Contraction in financial intermediation stronger than in last recession.

Citation: IMF Staff Country Reports 2010, 140; 10.5089/9781455205899.002.A001

Source: SECO.

13. Still, domestic credit has been relatively dynamic (Figure 4). Effective stabilization measures taken by the authorities (see below), together with the ability of smaller, domestically oriented, banks to pick up some lending business from larger institutions, helped support credit supply to the economy. While foreign credits haven fallen, pushing down total overall credit growth, mortgage lending (about 80 percent of total credit) was stimulated by lower interest rates and grew by more than 5 percent by end-2009. The SNB stressed that it’s lending survey—which over the summer had pointed to some tightening—now indicates that lending conditions were not further tightened.

Figure 4.
Figure 4.

Switzerland: Developments in Credit

Citation: IMF Staff Country Reports 2010, 140; 10.5089/9781455205899.002.A001

Sources: SNB Monthly Statistical Bulletin; SNB Bulletin of Banking Statistics; and IMF staff estimates.

Domestic lending has remained positive given mortgage credits.

Citation: IMF Staff Country Reports 2010, 140; 10.5089/9781455205899.002.A001

B. The Economy Entered the Recession in a Strong Position

14. Households and corporations entered the recession with relatively strong balance sheets. Swiss households’ gross debt-to-income ratios, traditionally high but more than matched by their large financial and non financial wealth, have remained stable in recent years. In contrast to most other European countries, non-financial corporate net debts to income ratios declined prior to the crisis and have remained relatively low.


Swiss debt-to-income ratios have been stable since 2003.

Citation: IMF Staff Country Reports 2010, 140; 10.5089/9781455205899.002.A001

Source: Eurostat.

Swiss non-financial corporate net debt to income declined preceding the crisis.

Citation: IMF Staff Country Reports 2010, 140; 10.5089/9781455205899.002.A001

Source: EuroStat.

15. While housing prices have increased steadily in the last few years, their progression has not reversed with the crisis (Box 1). Homeownership is at around 37 percent, reflecting nationwide rent control and tax policy (e.g. real estate is subject to wealth, income and capital gain taxes). Overall price increases have been steady and relatively low in international comparisons, and studies suggest they can to a large extend be attributed to fundamentals, in particular the rising number of immigrants.3 Prices also do not appear misaligned in view of real estate prices to rent ratios, as well as affordability indices, such as real estate prices to income ratios. Reflecting the decline in industrial activity, however, commercial property prices fell by 8.2 percent in 2009.


Swiss real estate price inflation followed a slow and regular trend.

Citation: IMF Staff Country Reports 2010, 140; 10.5089/9781455205899.002.A001

Source: SNB.

Swiss Real Estate Cycles

Swiss real estate price inflation has recently been low by international standards, and has not been extremely volatile.

  • Swiss real estate did experience a severe boom-bust cycle during 1987–91, which spilled over to the broader economy. During this period, signs of overheating on the housing market were pervasive–both on the sale and on the rental side. With households overextended, a sharp rise in interest rates, escalating unemployment, and contracting credit brought real estate values rapidly back to their late-1980 levels. The resulting fallout included numerous foreclosures, consolidation in regional banking (some 200 banks were absorbed), and an unusually long recession with protracted unemployment throughout most of the 1990s. General government debt rose from 31 to 55 percent of GDP from 1990 to 1998—one of the key factors behind the creation of the debt brake rule.

  • Basic misalignment indicators are inconclusive. Real estate prices have gradually increased in a linear fashion since 2000. Real estate inflation rates during this period have averaged between 4–5 percent per year, resulting in an increase in prices of single family homes and owner occupied apartments over the last 5 years between 20–25 percent. Ascertaining misalignment in Swiss real estate markets is problematic. There are a number of rules and regulations—many implemented in response to the 1990s bust—which make it difficult to determine if any asset class is out of equilibrium. However, a few simple comparisons are possible. The ratio of real estate prices relative to rental prices reveals a strong upward trend from the early 1990s to 2000, but a flattening since then. Also, while real estate price increases have been somewhat more dynamic than nominal incomes in the recent years, affordability measures have not deteriorated in the past 10 years. Still, market observers expect some possible decline in 2010 due to a slowdown in immigration, hence demand, in a market where supply remains dynamic.

C. Supportive Policies also Played a Key Role

16. A broad range of macroeconomic policy actions, and financial sector stabilization measures, have been taken in response to the crisis. The authorities took a series of measures aimed at stabilizing the financial sector, ensuring ample liquidity and avoiding excessive tightening of the monetary and financial conditions, and supporting demand and limiting labor market adjustment whose effects were reinforced by measures undertaken in partner countries4 (Box 2).

17. SNB measures contributed to limit the tightening of monetary and financial conditions (Figure 5). Reductions in real interest rates, and the rebound in equity prices from their early 2009 lows, partially offset the effective appreciation in the currency of about 4 percent in 2009, and 13 percent since the beginning of the crisis.

Figure 5.
Figure 5.

Switzerland: Monetary Developments

Citation: IMF Staff Country Reports 2010, 140; 10.5089/9781455205899.002.A001

Sources: SNB; and IMF staff estimates.

Exchange rate movements suggest large swings in competitiveness

Citation: IMF Staff Country Reports 2010, 140; 10.5089/9781455205899.002.A001

Source: Swiss National Bank.

Interest rate and equity movements partially offset a stronger currency.

Citation: IMF Staff Country Reports 2010, 140; 10.5089/9781455205899.002.A001

Source: Staff estimates, based on real exchange rates, interest rates, and equities. Real interest rates calculated using core inflation.

18. The re-pricing of risk of Swiss asset markets reflects the successful stabilization package and improved global environment. Most measures of financial stress have eased sharply from their early 2009 highs. Interbank liquidity has shown sustained improvements. The CDS spreads on Swiss confederation bonds, which had swelled at the height of the crisis in March 2009, and credit spreads of large banks and insurance companies, have declined significantly.

Main 2009–10 Policy Initiatives

Over the last year the authorities took action in a broad range of policy areas.

Regarding monetary policy, the SNB lowered the target range to 0 to 0.75 percent in March 2009, and targeted 0.25 percent. It extended the maturity of its repo operations and range of eligible counterparties. It provided liquidity through SFr/EUR swaps, jointly with the ECB, the National Bank of Poland and the National Bank of Hungary. The last such operation was undertaken in January 2010. It engaged in SFr/USD swaps with the Federal reserve, which expired on February, and provided USD liquidity. It also implemented unconventional policy measures—including exchange rate intervention, and purchases of Swiss private bonds—in order to stabilize monetary and financial conditions. The SNB has now shifted to exit mode and is scaling back liquidity since April 2009. Since mid-December, bond purchases have ceased, and only excessive appreciation vis-à-vis the Euro has been prevented.

In the fiscal area, the authorities allowed automatic stabilizers full play and enacted the last of three stimulus packages. These packages consisted in public investment in infrastructure and other areas (i.e. applied research, alternative energy production), as well as targeted labor market measures (extension of the duration of short-time work, incentives to hire young entrants on the labor market). These efforts were accompanied by further stimulus at the cantons and municipalities level. Fiscal stimulus is estimated at around ¾ percent of GDP in 2009 and 2010. More structurally, the debt brake rule was expanded to cover extraordinary expenditure effective as of 2010. A higher VAT rate to finance disability insurance was approved.

In the labor market, the duration of short time work benefits was lengthened from 12 to 18 months in April 2009, and to 24 months effective April 2010.

Building on measures in 2008, a series of financial sector actions were also taken.

  • In late 2008, FINMA had already announced new prudential rules for large banks to be effective by 2013: cyclically adjusted capital rules (200% of Basel II norms in good times; 150% in bad times); a leverage ratio cap (set at 5 in good times, 3 in bad times). In 2009, FINMA announced the progressive tightening of capital requirements on Cantonal and Regional banks, from 1 January 2010. In April 2010, FINMA and the SNB announced a new liquidity regime for the big banks, effective on 30 June 2010, that requires banks to cover the outflows estimated in a stress scenario over a period of at least 30 days.

  • In early 2009, the transfer of illiquid UBS assets into SNB stabilization fund (StabFund) was completed ($39 billion in total). By year end, the overall risk for the SNB was reduced by about one third. In August, the government sold its 9 percent stake in UBS for a 33 percent profit.

  • Deposit insurance coverage was expanded from SFr 30,000 to 100,000 per depositor; the cap on the system-wide liabilities increased from SFr 4 billion to SFr 6 billion; banks were required to hold assets in Switzerland equaling 125 percent of covered deposits; and a quicker payout mechanism implemented.

  • A “Too Big to Fail” (TBTF) working group, comprising both private and public sector representatives issued an interim report on April 22, with a final report which could be issued during the summer. The report defined TBTF institutions and described broad features of possible measures—notably added capital and liquidity buffers, a tighter limit on risk concentration, and changes in organizational structure to contribute to an orderly resolution in case of crisis. The calibration, however, still needs to be addressed.

  • New standards for remuneration schemes of financial institutions with at least SFr 2 billion in capital were implemented. The guidelines stress transparency and risk incentives; greater responsibility for structuring and monitoring the effect of remuneration is given to the firm’s boards of directors.

  • The FINMA-SNB memorandum of understanding (MoU) was revised. Guidelines and priorities for the cooperation have been codified.

19. The reaction of the labor market to the recession has been muted—due in part to targeted labor market measures. Employment has remained surprisingly stable at around 3.9 million, as job losses in manufacturing have been offset by gains in the service and construction sectors. The employment picture partly reflects labor hoarding encouraged by short time work programs (Figure 6). Subsidies for short-time employment cover 80 percent of reduced hours and their duration has been extended twice during the crisis; from 12 to 18 months in April 2009, and to 24 months in April 2010. Nevertheless, because of dynamic growth in the working population, the unemployment rate has increased by about 2 pps, from 2.5 percent in mid-2008 to 4.5 percent in February. The authorities were concerned that depending on growth prospects, workers in short time regimes could be pushed into unemployment. The resilience of employment, together with strong wage growth had played a major role in cushioning consumption during the recession.

Figure 6.
Figure 6.

Switzerland: Labor Market Developments

Citation: IMF Staff Country Reports 2010, 140; 10.5089/9781455205899.002.A001

Sources: SECO, Swiss Federal Statistics office, SNB; and IMF staff estimates.

Reaction of employment to growth has been so far moderate.

Citation: IMF Staff Country Reports 2010, 140; 10.5089/9781455205899.002.A001

Source: Swiss Federal Statistics Office.

D. Outlook

20. Looking ahead, a moderate recovery is taking hold. The authorities noted that despite the current strong growth, Switzerland had not decoupled from the rest of Europe. Thus the sharp rebound in growth in the second half of 2009 should moderate in the course of 2010. Real GDP is projected to expand by 1.6 percent in 2010 and by 1.8 percent in 2011. Manufacturing will strengthen; however, firms’ investment will lag given excess capacity in some sectors. Construction should overall continue to grow given order books, partly supported by lagged effects from fiscal stimulus. Real wage and income growth is expected to be sluggish, but some smoothing is expected to continue and consumption is overall expected to grow in line with GDP.

2010 Growth Forecasts


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Sources: SECO, KoF, Consensus forecasts, and IMF WEO.

March 2010 Consensus forecast.

Machinery and equipment investment for SECO and KoF.

21. Uncertainty surrounding the baseline is mainly related to the global recovery and developments on financial markets. The baseline scenario is a moderate recovery of Switzerland’s main trading partners and financial markets stabilization. There are however large uncertainties resulting notably from the impact of exits from accommodative policies, which could affect growth prospects in the country’s partners, and the value of the Swiss franc. Switzerland’s direct exposure to Greece is limited.

However, further market turmoil in the euro area could have significant repercussions, given Switzerland’s financial and trade links with the euro area. The impact on the currency would be uncertain, as safe haven effects may not be long lasting given spillovers to the Swiss economy. If downside external risks were to materialize, this would lead to a further rise in unemployment as firms would have less incentives to hoard labor. As monetary policy has little margins of maneuver, this would need to be mainly accommodated through fiscal policy.

22. Potential growth has declined in the short term and uncertainty on the medium run estimates has increased. The uncertainty around any estimate of potential output during a crisis is large. Overall, there was agreement that the global crisis would have less of an impact on potential growth than the large domestically originated financial shock of the mid-1990s. Many of the mitigating factors that cushioned this recession, including continuing credit supply, are likely to limit the decline in potential growth. Still, there is considerable uncertainty on the evolution of total factor productivity. From a policy point of view, however, the key issue is whether immigration flows will continue, and at what pace. With this in mind, staff’s preliminary estimates suggest potential growth has declined to around 1¼ percent in the short-run, mainly due to lower potential employment and capital accumulation, and could return to a medium term growth of around 1¾ percent–somewhat smaller than growth observed in the years preceding the crisis (Appendix I).

III. Challenges Remain

23. Exit from the current accomodative stance will have to be accompanied by structural measures to strengthen financial stability. While little short term fiscal consolidation is needed, exit from the current monetary stance is more challenging. Measures to handle the financial crisis have been effective, but risks remain in the financial system and, more broadly, the issues exposed by the crisis–the disproportionate size of contingent liabilities and the moral hazard issue of too big to fail institutions–still have to be addressed.

A. Monetary and Exchange Rate Policy Issues

24. The SNB has signaled its intention to raise interest rates over time, and to exit from the current exchange rate policy. The authorities noted that high levels of liquidity and prolonged period of low interest rates may lead to acceleration in mortgage lending and risky lending practices. Under a no policy change assumption, the SNB is projecting inflation to gradually pick up and exceed 2½ percent by mid-2012 (Figure 7). In this context, the current policy stance is seen to be incompatible with long-run price stability. Indeed, forward rates and Taylor-rule estimates—based on SNB inflation projections—currently suggest an increase of about a ½ percent by-end 2010. However, the authorities recognize that while their inflation projections signal that the current monetary policy cannot be maintained in the long run without incurring inflation risks, considerable uncertainty is attached to the inflation forecasts.

Figure 7.
Figure 7.

Switzerland Inflation Developments

Citation: IMF Staff Country Reports 2010, 140; 10.5089/9781455205899.002.A001

Sources: SNB and IMF staff estimates.

Markets expect a normalization of interest rates.

Citation: IMF Staff Country Reports 2010, 140; 10.5089/9781455205899.002.A001

Source: SNB.

25. Liquidity is being mopped up but the SNB’s balance sheet growth will not be fully reversed. Repos and swap instruments have been allowed to expire, and short-term SFr SNB bills are being used to further scale back liquidity. However, the SNB views the increase in foreign exchange reserves and private sector bonds as a more permanent part of its balance sheet, and acknowledges that it is therefore subjected to more currency and credit risk (Box 3). The loan corresponding to the funding of the StabFund also remains on SNB’s balance sheet. Looking ahead, while models suggest that even in a moderately pessimistic scenario, the remaining assets would generate a significant amount of cash to pay down the loan, the SNB could suffer losses–given that the first loss buffer of about $4 billion has been exhausted. The authorities noted that this was one of the factors behind the SNB’s planned increase in capital. Accordingly, the SNB plans to increase provisions drawn from annual profits in 2009–13, and to reduce the amount distributed to the cantons in the form of dividends.

Sources: SNB April 2010 Monthly Statistical Bulletin; IMF staff estimates.

26. Since December, the authorities are only preventing excessive appreciation of the Swiss Franc vis-à-vis the euro. During this period, the SFr/euro rate has appreciated by 4 percent—the effective appreciation of the SFr has, however, been more limited at 3 percent. Latest data indicate that interventions have continued in the first quarter of 2010—leading to a pick up in the size of the balance sheet. Pointing to strong fundamentals, and notably to a projected return of current account surpluses as a share of GDP to double digit territory, staff noted that the currency did not appear to be misaligned (Box 4)—a view shared by the authorities. The authorities also indicated that the objective was, over time, to return to a free floating currency regime. Staff endorsed this intention and noted that interventions, if any, should be limited to resist disruptive short term movements in the effective exchange rate.

Exchange Market Intervention and Foreign Currency Reserves

Given safe haven flows, periodically the SNB has been confronted with a choice of accommodating the demand for Swiss francs or allowing the currency to appreciate. The first option may not always be available in an environment of frequent low interest rates and may endanger price stability, while the second reduces competitiveness of Switzerland’s large export sector.

In this context, currency intervention by the SNB has been used from time to time to smooth out disorderly fluctuations, resulting in large variations in the stock of foreign currency reserves.1 In particular, since unconventional measures were introduced in March, 2009 the SNB has more than doubled its stock of foreign currency reserves, moving from about SFr 45 billion in 2007 to some SFr 95 billion by-end 2009, and to SFr 125 billion by end-March 2010. While large in comparison to many other industrial country central banks, a substantial amount of precautionary reserves can make sense given the SNB’s LoLR responsibilities, and the relative size and exposure of the banking system. At the end of 2009, the size and currency composition of foreign currency reserves matched up well against the banking system’s net foreign currency exposures. Also, while high, the stock of reserves did not appear out of line with past trends in key metrics. However, it has since then risen, reflecting recent interventions.


In historical terms, the SNB’s foreign assets are not an overly large part of the balance sheet, but are high in terms of GDP.

Citation: IMF Staff Country Reports 2010, 140; 10.5089/9781455205899.002.A001


Composition of foreign exchange reserves tend to match banking system exposures.

Citation: IMF Staff Country Reports 2010, 140; 10.5089/9781455205899.002.A001

1 Some 69 episodes of currency intervention occurred between 1987 and 1995—with all but three interventions undertaken jointly with the U.S. Federal Reserve and German Bundesbank. An explicit exchange rate target, however, was implemented only once before 2009. In that episode (1978-79), a target of “well over 80 francs per 100 German marks” was set. Given the DM-Euro rate, this translates to an exchange rate of about SFr 1.57 per Euro today or about 1.51 in real terms.


Switzerland is a highly competitive economy. Exports to GDP have increased over time and external trade has been an important growth driver, contributing about a third to average 1990–2008 growth. The trade balance surplus has continued to expand, and after marked declined in financial flows in 2008, the current account surplus has quickly snapped back. Importantly, market shares and export prices have generally remained stable even during the sharp drop in global trade—and appreciation of the Swiss franc. Switzerland also consistently ranks high in cross-country comparisons (e.g., World Economic Forum) of competitiveness.


Export dependence has been high and rising.

Citation: IMF Staff Country Reports 2010, 140; 10.5089/9781455205899.002.A001

Source: WEO.

CGER estimates indicate competitiveness remained stable, despite the appreciation of the Swiss franc. According to the External Sustainability approach, the medium term current account surplus substantially exceeds what is required to keep the net foreign asset level stable, implying a strong competitive advantage. However, as noted in past staff reports, several factors, notably Switzerland’s role as an international wealth manager, help to keep current account surpluses high—effectively overstating competitiveness. The Macrobalances approach reflects the difference between the actual current account and a computed norm based upon structural factors and taking into account the fact that Switzerland is a financial center. This method implies a small competitive advantage. The Equilibrium Exchange Rate approach—which compares actual and estimated equilibrium real exchange rates—indicates a minor competitive disadvantage. However, use of other real exchange rates (e.g., ULC based) suggests that this may be overstated. On net, the average of the three methodologies suggests that the currency could be slightly undervalued—consistent with the authorities’ analysis. Thus, while uncertainty is high, the Swiss franc does not appear to be misaligned. These results are broadly unchanged from a year ago. In particular, the possible downside risks mentioned last year have not materialized—while current account surpluses have been affected by the crisis, they have rebounded and are expected by staff, and the authorities, to be back in double digit territory in the medium-run.

Switzerland: Competitiveness Assessment 1/

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Source: IMF staff estimates.

A negative number indicates a competitiveness advantage.

27. There is agreement on the inherent tension between raising interest rates and the appreciation pressures, and on subdued inflation prospects in the short-term (Figure 6). While inflation and inflation expectations have picked up, staff and the authorities project inflation in 2010–11 to remain under 1 percent given the sizable slack in the economy, muted wage demands and pass-through from past currency appreciation.5 The authorities agreed that while they saw current stance as incompatible with price stability in the medium-term, uncertainty was high and it was too early to raise rates. Moreover, preliminary indications suggested that lending standards have not materially deteriorated, and prudential tools were seen as possibly useful if this risk materialized. The SNB is monitoring the situation and in addition to its quarterly survey on credit standard, it is currently conducting a specific survey on newly issued mortgages to households.

B. Fiscal Policies

28. In spite of the recession and of the stimulus efforts, local authorities and the federal government still registered surpluses in 2009. Since the start of the debt brake in 2003-04, the general government balance had swung from a 2 percent of GDP deficit to a surplus of about1 percent in 2008 (Tables 4 and 5). A surplus was still registered in 2009. At federal level, revenues were more resilient than expected and expenditures—notably interest outlays—lower6. Since 2004, the federal debt brake’s notional reserve account accumulated approximately SFr 13 billion, or about 2.2 percent of GDP (Box 5). The debt to GDP ratio shrank from about 55 percent in 1998 to just above 40 percent in 2009. While the general government debt in many other European economies soared during the recent economic crisis, Swiss general government debt remained stable, and is about 30 percentage points below the EU average. This solid fiscal position is reflected in a low risk premium, similar to Germany.

Table 3.

Switzerland’s International Investment Position, 2005–09

(in millions of Swiss francs, unless otherwise indicated; total at year’s end)

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Source: March 2010 SNB Monthly Bulletin.

Expansion of reporting population in 2004.

In 2005, distribution to Confederation and cantons of proceeds from gold sales.

In percent of GDP.

Table 4.

Switzerland: Federal Government Finances, 2007–13

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Sources: Federal Ministry of Finance; and IMF staff estimates.

Includes the balance of the Confederation and extrabudgetary funds (Public Transport Fund, ETH, Infrastructure Fund, Federal Pension Fund).

Table 5.

Switzerland: General Government Finances, 2007–13

(In billions of Swiss francs, unless otherwise specified)

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Sources: Federal Ministry of Finance; and IMF staff estimates.

Includes the balance of the Confederation and extrabudgetary funds (Public Transport Fund, ETH, Infrastructure Fund, Federal Pension Fund).

Includes old age, disability, survivors protection scheme as well unemployment and income loss insurance.


Balance of the General Government

Citation: IMF Staff Country Reports 2010, 140; 10.5089/9781455205899.002.A001

29. In 2010, general government balance is projected to swing into a small deficit. While expected to respect the debt brake, federal government balance is estimated by the government to swing into a small federal deficit—reflecting some lagged effects of the recession on revenues, stimulus related measures, and a marginal impact of tax measures (0.1 percent of GDP). Social security is expected to register a higher deficit (-0.6 percent of GDP, after -0.2 percent in 2009), as a result of the labor market situation, and local authorities to see their situation deteriorate.

Switzerland’s Debt Brake Rule

The “debt brake” was introduced in 2003 after a series of large deficits in the 1990s. The rule sets an annual upper limit on federal expenditure, based on projected cyclically-adjusted federal revenues. This allows deficits when the economy is below potential and requires surpluses in the opposite cases. The cyclical position of the economy is estimated using a modified HP filter, with a lower smoothing parameter for the last two observations to correct for the end-point bias problem.

Ex-post balances feed into a notionalcompensationaccount, used to ensure that slippages do not accumulate and that nominal debt is contained. If a negative balance in excess of 6 percent of expenditure builds up, it must be reduced below this threshold within three years.

The debt brake rule was amended as of 2010 to include extraordinary one-off expenditures. The balance between extraordinary expenditure and extraordinary revenue is maintained in a separate notional account. Deficits in any given year have to be compensated within six years. Application to lower levels of government is also being contemplated.

30. As it expects federal balance to turn into a small structural deficit in 2011, the government expects some consolidation need of around 0.3 percent of GDP. For 2011–13, planned permanent tax reductions, including tax allowances for large families and adjustment to income tax brackets, will amount to SFr 1.3 billion per annum. All in all, with stimulus measures ceasing to weigh on the budget but an expected increase in interest outlays, the government estimates the necessary effort required to maintain expenditures below potential revenues under the debt brake to be between SFr 1.3 to 2 billion over 2011–13.

Overall Fiscal Balance

(Percent of GDP)

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Sources: Swiss Federal Finance Administration and staff estimates.

31. While respecting the debt brake rule is necessary, and given the fragile recovery and expected tightening of monetary conditions, staff noted that consolidation should in the short run be calibrated to what the rule requires. Less consolidation effort might be needed in view of the consistent under-evaluation of some revenues in the recent years. In particular, withholding tax revenues estimate—currently an average of the last 10 years performance—could better reflect more recent outcomes. The authorities acknowledged this possibility, but argued that withholding taxes were volatile and that they saw merits in keeping an estimation method with a strong smoothing power.

32. However, medium term challenges still have to be addressed. The dependency ratio is projected to double by 2060, in line with the European average. According to the 2008 Long-Term Sustainability report, public expenditures will increase by 5 percent of GDP by 2050 as a result of ageing, with roughly equal increases in old age and disability insurance expenditures, and in health and long term care. The first pillar pension system will swing into deficit within 5–10 years. Regarding disability insurance, the temporary increase in VAT will cover its deficit for the next six years. The authorities agreed with the need to address medium-term fiscal pressures rising from an ageing population, and concurred with the view that ambitious reforms would be needed (e.g., parametric adjustments in the old-age insurance system).


Old age dependency ratios of selected European countries.

Citation: IMF Staff Country Reports 2010, 140; 10.5089/9781455205899.002.A001

Source: Eurostat, EUROPOP 2008 convergence scenarios.

C. Financial Stability

33. A number of risks remain. The banks have largely written down their losses, shed some SFr 1½ trillion in assets from mid-2007 to end-2009, de-risked their balance sheets, and strengthened their funding and capital positions. At end-2009, Tier 1 capital ratios at UBS and Credit Suisse stood at 15 and 16.3 percent respectively—an improvement of 4 and 3 pps over the year (Figure 8). Similarly, leverage ratios (Tier 1 capital to total assets) have improved to 2.3 and 3.5 as of end-2009, for UBS and Credit Suisse respectively. Still, although the banks have largely reduced their risks, the impact of further asset deterioration—either from legacy assets exposures or from other categories of risk—could be substantial given the still sizeable exposures of Swiss banks. Banks would in particular be exposed to turbulences in the Euro area, if unchecked, but more through their impact on their counterparties and from the knock-on effects on the Swiss economy than through their direct exposure. At the same time, dependence on wholesale funding still appears to be elevated, requiring careful monitoring by the authorities.

Figure 8.
Figure 8.

Switzerland: Banking Sector - Capital Ratios 1/


Citation: IMF Staff Country Reports 2010, 140; 10.5089/9781455205899.002.A001

Source: Bloomberg.1/ The data covers only the largest banks in the system. For Switzerland and Germany, two banks each; for the U.K., four banks; and for the U.S., seven banks. U.S. averages and 2008 first quarter data exclude Goldman Sachs and Morgan Stanley in the first two panels.

Exposure to Emerging Market (EM) and Selected European Countries asa Percent of GDP

Citation: IMF Staff Country Reports 2010, 140; 10.5089/9781455205899.002.A001

Source: BIS and staff estimates.

34. The business models of banks will come under some pressure. While by the last quarter of 2009 the two large banks had restored some profits, favorable refinancing conditions will subside at some point. Net new money flows also remained negative in one of the banks. Potentially stricter ring fencing of capital and liquidity for subsidiaries in third countries may also adversely affect the risk and liquidity management of the large cross border banks, and dent their profitability. Moreover, full acceptance by Switzerland of Article 26 of the OECD model tax convention, together with tax amnesties and disputes over taxrelated client data, are likely to result in further outflows of banking assets. This was seen by large banks as having a limited impact on their activity - as some of the outflows were moving to their on-shore banking activities—but should expose the private banking industry to consolidation pressures.

Liquidity Ratios by Region 1/

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Source: Bloomberg

Based on top 36 LCFIs with headquarters with headquarters in the regions.

35. Importantly, banks will need to adapt to new regulatory requirements, notably from revisions to Basel II. New Basel proposals would imply lower leverage and lower return on equity. The two large Swiss banks would be particularly affected by the exclusion of hybrid capital and deferred tax assets from the definition of Core Tier 1, the likely new benchmark for capital. Only about 64 percent of the current capital structure of the two large Swiss banks qualifies for the Core Tier 1 definition according to current proposals. Also, higher capital requirements for the trading portfolio as well as and higher capital charges for OTC derivatives that are not cleared and settled through central counterparties would likely put pressure on earnings, and more stringent liquidity coverage requirements could increase funding costs.