Greek turmoil strengthens franc, say experts

Investors who turned to the franc as a classic safe haven currency during the financial crisis should be altering their strategy now that the global economy appears to have weathered the worst, but the national currency remains strong, despite concerted Swiss intervention to keep it under control.

“Recent developments in Greece have put pressure on the euro and hence led to an appreciation in the other currencies including the Swiss franc,” said Professor Jan-Egbert Sturm of the Swiss Economic Institute (KOF). The euro has declined by about five cents against the franc since mid-December.

For the fourth time in twelve months the Swiss National Bank (SNB) last week intervened in the currency markets to alter the strength of the franc. It is widely-known that the bank was influenced by the Greek impact on the euro, according to Professor Hannah Scobie, director of the European economics and financial markets centre in London.

Importing countries such as Germany and France used to pass on the cost of fluctuating exchange rates to the consumer, but this is no longer the case, Scobie told Swisster. “Exporters have to absorb the cost,” she said, a worrying prospect fo Switzerland's largely export based economy.

Sturm expects pressure on the franc to “remain strong,” meaning that Switzerland’s best hope is for the SNB to intervene again.

Greece is 300 billion euros in the red. “The deficit is extremely large,” said Costa Vayenas, head of emerging market research at UBS in Zurich, who agrees that the franc is likely to keep rising in response to current conditions.

In fact, the deficit of is four times that that allowed by the European Commission which is keeping a close eye on new ‘austerity measures’ announced by the Greek government.

“The market is comparing Greece to borrowers like Ghana and Sri Lanka,” in terms of credit worthiness, said Vayenas.

Measures announced by Greek Prime Minister, George Papandreou, include public sector wage cuts, a higher retirement age and higher fuel tax, but Vayenas said the policy is too-focused on raising taxes, which could over-burden Greek trading.

Governments and businesses in Europe need to keep close tabs on events in Greece, warns Scobie.

Her institute monitors the financial markets closely each day to check what the key players are doing. Scobie has seen investors across Europe shy away from Greece, given the recent turmoil.

Although Greece only represents 2.7 per cent of the gross domestic product (GDP) of Europe, the economists are apprehensive.  “The situation in Greece is certainly worrisome,” Sturm told Swisster.

“Markets remain concerned,” said Vayenas. The Greek government is borrowing euros at 7 per cent, while corporate and household borrowing costs are already above this and increasing.

Regarding the trail of lenders to the Greek state, “it will take time to know exactly who's involved,” he added.

Officials and customs inspectors are holding strikes over the wage cuts which have led to cues of lorries unable to import goods from other parts of Europe.

But outside of the currency problems, the direct impact on Swiss traders is small.

Switzerland’s export share with Europe amounts to 71.26 per cent, whereas the export share of Greece is only 0.86 per cent, say KOF figures. “Therefore, the direct impact on the Swiss exporters is negligible,” said Sturm.

Banks may be involved with financing Greek hotels and ships, but there is no evident big risk to Swiss finance, he added.

UBS and other financials were reluctant to respond to Swisster enquiries about their involvement in Greek markets. “It is Zurich's policy not to disclose its single investment exposures,” said Tatjana Domke, a spokesperson for insurer Zurich Financial Services.

Dedicated private banks such as the listed firm, Julius Baer, have no credit or lending businesses, but Swiss wealth managers look after cash owned by rich Mediterranean individuals.

The Greek situation may add to Swiss banking secrecy woes, if authorities start sniffing around citizens who hold cash and assets abroad, in order to recover state revenues lost from tax evasion.