VZCZCXYZ0000
RR RUEHWEB

DE RUEHSW #0023/01 0131018
ZNR UUUUU ZZH
R 131018Z JAN 09
FM AMEMBASSY BERN
TO SECSTATE WASHDC 5599

UNCLAS BERN 000023 
 
SIPDIS 
 
DEPT FOR EEB/IFD/OMA AND EEB/EPPD 
 
E.O. 12958: N/A 
TAGS: EFIN ECON SZ
SUBJECT: UPDATE OF SWISS RESPONSE TO FINANCIAL CRISIS 
 
REF: A. BERN 544 
     ¶B. BERN 546 
     ¶C. BERN 552 
     ¶D. EMAIL L.FRERIKSEN/J.KESSLER RE: ECONOMIC MATRIX 
        INPUT 10/23/08 
 
¶1.  Summary.  Switzerland's economic outlook has steadily 
declined over the past three months with negative growth 
forecasts, increased unemployment, and industrial sectors 
starting to show the signs of stress.  Despite the economic 
downturn, bank lending practices have not been impacted.  The 
GOS has taken several actions to stem the recent economic and 
financial downturn, including a relaxation of monetary 
policy, and implementation of its UBS rescue package (Ref A). 
 Following a public initiative, the GOS will further regulate 
bank executive salaries.  The GOS restructured capital and 
leverage ratio regulations and is in the process of 
introducing liquidity ratio regulations to lessen the impact 
of future financial downturns.  End Summary. 
 
----------------------------- 
Economic Outlook Deteriorates 
----------------------------- 
 
¶2.  The Swiss outlook and economic projections have steadily 
declined over the past three months.  The GOS altered growth 
forecasts from a marked slowdown with very low growth in 2009 
to a forecast of negative 0.8 percent GDP growth for all of 
¶2009.  With the exception of consumption, all demand 
components are expected to decline.  The KOF Swiss Economic 
Institute's economic growth barometer, which measures the 
economy's likely performance for the next six months, reached 
a five year low.  Unemployment rates climbed from 2.5 percent 
in October to 2.7 percent in November and to 3.0 percent in 
December, and is expected to rise further to near 4.0 percent 
by late 2009.  Many industry sectors are beginning to show 
signs of the economic crisis, although a few sectors are 
still posting positive sales. 
 
¶3.  Lending practices continue to hold in Switzerland.  The 
Swiss National Bank (SNB) conducted regular surveys of 20 
major Swiss banks to follow lending patterns.  The SNB 
reports that in the vast majority of institutions surveyed, 
no lending restrictions were announced in the third quarter 
of 2008.  Only 15 percent of banks reported that lending 
practices had become slightly more restrictive. 
 
¶4.  While the SNB continues to monitor the economic outlook, 
SNB officials and State Secretary for Economic Affairs Jean 
Daniel Gerber cautioned through press releases that it is 
hard to predict the impact of the financial crisis on 
Switzerland until there is greater certainty regarding the 
U.S. economy. 
 
----------------------------- 
Relaxation of Monetary Policy 
----------------------------- 
 
¶5.  Since reftel reporting on the financial crisis, the GOS 
continues to react to an increasingly negative economic 
outlook, even though it has not been as severely impacted as 
other advanced economies.  The SNB mirrored the U.S. Federal 
Reserve Bank by further relaxing its monetary policy several 
times over the previous three months.  SNB lowered the 
interest rate 50 basis points on November 6, 100 basis points 
on November 20, and 50 basis points on December 11 resulting 
in a current interest rate of 0.5% and a decrease of the 
target range for the three month Libor to 0 to 1 percent. 
 
¶6.  According to SNB Governing Board Chairman Jean-Pierre 
Roth, the reasons behind the monetary policy rest on three 
factors:  1) the international economic outlook deteriorated 
markedly, which negatively impacted forecasts for the Swiss 
economy; 2) the financial market crisis intensified; and 3) 
prices for raw materials and oil plummeted, which combined 
with the worsening economic outlook, led to a marked 
improvement in inflation and maneuvering room for the SNB. 
 
------------------------------------ 
Economic Stimulus Packages Announced 
------------------------------------ 
 
¶7.  On November 12, the Federal Council announced the first 
economic stimulus package following the downward revisions of 
economic forecasts.  The package envisioned to boost economic 
activity and employment involves an infusion of up to Sfr 1.5 
billion ($1.2 billion) (0.2 percent of 2008 GDP).  Immediate 
measures included Sfr 66 million to move natural hazard 
management projects forward, Sfr 20 million for federal civil 
construction projects, and Sfr45 million for residential 
construction.   The GOS plans to lift a freeze on credits 
totaling Sfr205 million in January 2009, which will be 
directed toward transportation, education, farming and 
defense.  Lastly, the GOS will pay back funds set aside as a 
crisis reserve paid into by 650 companies totaling Sfr550 
million. 
 
¶8.  On December 21, the GOS announced a second stimulus 
package totaling Sfr650 million ($590 million).  The package 
will be implemented in Spring 2009.  Details regarding the 
use of the money have not been provided.  The GOS has already 
indicated that a third stimulus package may be necessary if 
Switzerland does not recover by 2010. 
 
-------------------------------------- 
Financial Crisis Impact on Swiss Banks 
-------------------------------------- 
 
¶9.  As reported in ref A, the GOS provided UBS, Switzerland's 
largest bank, a $60 billion rescue package that has been 
approved by Parliament.  The SNB has now created a special 
purpose vehicle, the SNB StabFund, to acquire the illiquid 
assets of UBS.  The first tranche of assets was acquired on 
December 16, whereby UBS transferred slightly over 2000 
securities positions worth $16.4 billion.  The majority of 
the assets were US and European residential and commercial 
mortgage backed securities.  Speculation regarding further 
massive write-offs by UBS in the fourth quarter of 2008 lead 
to a 5 percent drop in UBS' stock on January 12, 2009. 
 
¶10.   CreditSuisse, Switzerland's second largest bank, 
avoided government intervention by boosting its capital Sfr10 
billion through private investors. The capital infusion 
proved priceless when CreditSuisse needed to write off Sfr3 
billion in losses in the fourth quarter of 2008. 
 
------------------------- 
Executive Bonuses at Risk 
------------------------- 
 
¶11.  UBS executives voluntarily agreed to forgo their bonuses 
following UBS' request for GOS assistance and the bank's 
massive write-offs.  In November, UBS former Chief Executive 
Peter Wuffli said he would forgo his Sfr12 million bonus. 
Following suit, former Chairman Marcel Ospel, Vice-President 
Stephan Haeringer and former Finance Chief Marco Sutor agreed 
to waive their bonuses worth Sfr 33 million.  UBS announced a 
revised bonus structure so that future bonuses will be paid 
only upon reaching long-term results. 
 
¶12.  Regardless of UBS' new bonus system, a general outcry 
from the public for the government to restrict CEO bonuses 
continues to support the popular initiative "Against fat-cat 
salaries", which was submitted to the government on February 
26, 2008.  The initiative would outlaw golden parachutes, 
golden handshakes, and bonuses, and require the annual 
general meeting to vote on total pay awarded to executives. 
On December 5, the Federal Council responded to the 
initiative by issuing a comprehensive bill revising the 
company and accounting law as an indirect counter-proposal. 
The bill is more moderate that the public initiative.  The 
Federal Council requested parliament approval of its bill 
over the initiative.  According to the Federal Council, its 
revisions would "result in balance between the various 
governing and executive bodies in a company, create 
sufficient transparency in the pay packages awarded to top 
managers, as well as in internal processes, and instigate 
measures to secure the position of shareholders as the 
company's owners." The bill provides greater protection to 
shareholders' assets by requiring fees paid to directors to 
be approved at the company's annual general meeting. 
 
--------------------------------- 
Lessons Learned:  New Regulations 
--------------------------------- 
 
¶13.  SNB's Governing Board Vice Chairman Philipp Hildebrand 
commented that the "financial system needs to be more 
resilient to possible shocks."  The SNB has focused on the 
need to improve the "shock absorbers": capital and liquidity 
by implementing regulatory reforms.  According to Hildebrand, 
both of the regulatory measures are in line with proposals 
made by the Financial Stability and the G20 action plan, a 
well as the strategy of the Basel Committee on Banking 
Supervision for implementing lessons from the crisis.  He 
noted that the regulations are intended to supplement Basel 
II, not to replace it. 
 
¶14.  New Capital Adequacy Regulation:  The Swiss Federal 
Banking Commission's reform of the capital adequacy 
regulation for big banks is designed to increase 
risk-weighted capital together with the introduction of a 
leverage ratio.  The regulation will require big banks to 
increase risk-weighted capital.  During upswings, banks will 
be required to considerably exceed the minimum requirements 
for capital and leverage ratios to ensure a buffer exists to 
absorb losses during crises.  Banks will not be required to 
comply with the higher risk-weighted capital ratio and 
leverage ratio until 2013 to allow the banks to recover from 
the current crisis before implementation. 
 
¶15.  Liquidity Ratio:  New regulations are in the process of 
being drafted to address inadequate liquidity.  According to 
Hildebrand, the two big Swiss banks were hit particularly 
hard by the financial crisis to a large extent as a 
consequence of their extraordinarily high leverage. 
De-leveraging amplified the shocks to the financial system. 
The objective of the new regulation is "to obtain higher 
liquidity buffers that better reflect the great complexity of 
liquidity risks.  When calculating liquidity requirements for 
various crisis scenarios, the authorities use internal model 
calculations by the banks.  In order to ensure the 
comparability and transparency of the internal calculations, 
the new regime foresees certain standardisations." The 
conclusion of the project is scheduled for early 2009. 
 
------- 
Comment 
------- 
 
¶16.  Although Switzerland has not yet been effected by the 
global financial crisis and economic slowdown to the same 
degree as other advanced economies, the GOS is taking every 
measure to lessen the eventual impact.  With the majority of 
Swiss exports and imports reliant on the EU and US markets, 
the GOS will continue to monitor these economies closely and 
likely adjust internal regulations and stimulus packages in 
response to any further deterioration in either economy. 
CARTER