The Financial Tsunami: Gigantic Swiss Banks Hold Steady -- For Now
The Swiss economy is dwarfed by the size of its leading banks, and there are growing worries about their health. The government says everything is fine, but some disagree.
Banking giant UBS's troubles could ripple across the entire Swiss economy.
"First and foremost it is the financial center of Switzerland that will bleed," prophecies Beat Bernet, bank expert at the University of St. Gallen. By now people are even contemplating the unthinkable: the collapse of Europe's leading bank, the largest money manager in the world, UBS.
The Swiss have been forced once already to wave goodbye to a national icon. Swissair, whose solidity earned it the moniker "the flying bank," shut down in 2001. It was a traumatic crash-landing for the whole country, and Swissair's collapse cost the state over 2 billion Swiss francs (1.3 billion). The big banks also bore guilt for the failure. As later became public, UBS had refused to extend funding to Swissair for emergency operations. This is how the bank earned its nasty nickname among the populace, "United Bandits of Switzerland."
Now, UBS is once again in the hotseat. Since the financial crisis began, the firm has experienced heavy losses and has seen writedowns of 45 billion Swiss francs (29 billion). The investment bankers on Wall Street allowed themselves to run riot, above all with the meagre savings of small deposit-holders. UBS announced last week it was cutting 2,000 investment banking jobs. As the Neue Zürcher Zeitung recently put it -- with refreshing openness -- "the nicest thing you can say about the American bankers -- and about their imitators as UBS -- is that they were unscrupulous."
"We owe this crisis an uncomfortable revelation: UBS and Credit Suisse are too big for Switzerland," wrote the ex-editor-in-chief of the German weekly Die Zeit, Roger de Weck, last week in the Swiss periodical Das Magazin. "If they went bankrupt, a flourishing country would be ruined."
Swiss Economics Minister Doris Leuthard on Thursday told a Swiss radio station that "we in no way would want one of our big banks to find itself in a serious crisis that might lead to bankruptcy. The federal government would absolutely prevent that." James Nason, spokesman for the Swiss Bankers Association, told the Associated Press on Thursday that "we don't see any sign of a banking crisis. The Swiss financial center is proving to be remarkably resilient."
Still, apart from the mini-states of Liechtenstein and Luxembourg -- and, of course, Iceland -- no country in Europe is as dependent on banks and insurance companies as Switzerland: Eighteen percent of its gross domestic product comes from the financial sector. In the UK and the US it's seven and five percent, respectively. The Swiss finance industry employs about 100,000 people; over half of these work for one of the two banking giants. When it comes to the country's savings deposits, the two banks command a combined market share of 80 percent.
In the meantime, Zürich has begun to feel the first shock waves from the banking tsunami. Switzerland's largest city is at the mercy of its banks: For the almost 400,000 people who live there, 42,000 of their jobs come from the financial sector. Last year the finance industry paid around a third of the city's taxes.
The champagne years are over: For 2008 and the next two years the banking metropolis projects a tax shortfall of well over half a billion Swiss francs. That would put one of the richest cities in the world firmly in the red.
And until Thursday, the Swiss government had said remarkably little about the developing crisis. Last week, as banks faltered around the world and governments wrung their hands to find solutions, the Swiss capital remained uncannily quiet. "The Global Economy is Staring into an Abyss. Bern Remains Silent," ran the angry headline from the Swiss newspaper NZZ am Sonntag. Unlike in other countries, where at least the puny protection limits on individual deposits has been boosted, here people prefer to put their trust in God and in their banks. A laughable four billion Swiss francs (2.6 billion) per bankruptcy is the upper limit of protection guaranteed by the government. In the meantime the state-owned Canton banks are enjoying a surge in customers.
Finally on Tuesday came a special meeting. The government declared itself "worried," but determined the state of the banks to be "secure overall," according to Justice Minister Eveline Widmer-Schlumpf. On Wednesday the Swiss Central Bank took part in a collective move with other central banks and lowered their prime interest rate.
And ultimately there is a plan B: should UBS really go under, a secret agreement would certainly come into effect and the ECB would spring to its aid. So much for Switzerland's proud independence.
© SPIEGEL ONLINE 2008
All Rights Reserved
Reproduction only allowed with the permission of SPIEGELnet GmbH