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Swiss national bank decision shocks Europe

Zurich, Switzerland

After decoupling the Swiss franc from the euro in January, effects of the franc’s rising value are felt in the Eurozone and Switzerland.

March 2015

Two months after the Swiss National Bank’s decision on January 15 to stop supporting the euro and allow the Swiss franc to rise in value, currency markets have adjusted with the euro and the dollar worth less, and the Swiss franc worth more, not the 30+ percent that it rose initially but in the 15-20 percent range.

No longer pegged at 1.20 euro as it had been for more than three years, the Swiss franc has hovered around 1.06 per euro and is approaching equivalence. With the euro challenged by the prospect of quantitative easing, the continuing Greek default possibility once the four month extension ends in June, and slow growth in the Eurozone, no other currencies including the dollar and the pound are rising as much as the franc.

To control that rise and prevent inflation, the Swiss National Bank (SNB) has lowered the interest rate, already negative at -0.25 to -0.75. However, while Swiss banks cannot promise that sums deposited will grow, they are still considered among the safest places in the world to park money.

The Swiss economy was expected to grow at a rate of 1.8 percent in 2015. With the end of the euro peg, the experts at UBS expect no more than 0.5 percent this year while others forecast a decline. Despite the sluggish growth, Switzerland still has one of the world’s most stable economies.

Although prices for imported items went up with the rise of the franc, many retailers immediately offered reductions in the neighbourhood of 18 percent. With low unemployment, Switzerland’s citizens can generally manage their relatively expensive lifestyle at least for now.  Many of them also live near borders with France or Germany and are used to shopping in whichever country the bargains can be found.

For the buyers of Swiss goods outside the country, everything is going to be more expensive. Luxury items like watches will be affected, but it’s unlikely that the people who pay thousands of dollars or euros for a Rolex or a Breitling will be seriously reluctant to buy.

It’s the buyers of Swatch timepieces and Swiss chocolate who are likely to notice – and perhaps switch to cheaper products. The CEO of Swatch, Nick Hayek, was quoted in the Economist as saying that the SNB’s action created “a tsunami” for exporters, the tourism industry, “and the entire country.”

In fact, tourism is the fourth biggest generator of foreign exchange after the chemical, machine, and watchmaking industries. With the tsunami coming at the height of the winter ski season, it’s not yet clear how many Swiss will prefer to go abroad where their money is worth more and how many foreigners will stay away from Swiss resorts in favour of those in cheaper neighbouring countries.

Beyond tourism, the many international organisations that have their base in Switzerland may well be affected. Geneva hosts headquarters for 21 major international groups including the International Labour Organisation and the World Health Organisation, most of them connected to the United Nations. In addition, 250 non-governmental organisations that radiate around the UN can be found in the city. Their expenses will rise as the franc appreciates.

So will the cost of wages and other business expenses for the multinationals that have offices in Switzerland, long one of the favourite springboards for doing business throughout Europe and beyond. Decisions to reduce staff or close entirely an office in Switzerland may be more frequent now that costs elsewhere will seem more reasonable.


Commercial real estate remains attractive for big companies because in Switzerland there aren’t many opportunities for growing money. In January just before the SNB cut the euro peg, Swiss Life Holding AG bought a Geneva office building for 535 million Swiss francs [USD 613 million].

That building at 8 Rue du Rhone in the heart of the elegant shopping district has become harder to rent because rents have gone up with the rise of the franc. Fredy Hasenmaile, head of property research at Credit Suisse Group AG in Zurich, told Bloomberg recently that “prices keep going up and we expect vacancies to rise further in the next two years.”

However, Martin Signer, head of real estate at Swiss Life, isn’t worried even though 17 percent of the space at 8 Rue due Rhone is vacant. The previous owner is refurbishing the building, and more vacancies while construction goes on is normal. “We are very confident,” Signer stated to Bloomberg in an email, “that this vacancy rate will quickly be reduced, in part because of the unique location and the modern and flexible refurbishment standard.”

The office vacancy problem isn’t limited to Geneva where the vacancy rate of 4.9 percent is the highest since 1998, according to data compiled by Jones Lang LaSalle Inc., and top annual rents fell in 2014 to CHF 925 per square meter.

The vacancy rate in Zurich reached 5.1 percent in Q4 of 2014. That was the highest percentage of vacancies since 2004. Top annual rents have fallen from CHF 1100 per square meter in 2011 to CHF 825.

Martin Bernhard, head of research at Jones Lang LaSalle in Zurich, is concerned that the strong franc may be a barrier for foreign companies starting operations or expanding in Switzerland: “If the franc increases further against the euro and the U.S. dollar, companies will think twice about expanding their presence here because it’s already expensive.”

In December Google Switzerland announced it was leasing 50,000 square meters for an engineering centre in Zurich. No word yet on whether anything will change now after the rise of the franc.

But everything is relative. Insurance companies and pension funds still buy office buildings in Switzerland’s two leading cities for small stable returns at a time when bonds and other fixed income investments bring negative returns.

In 2014 sales of commercial properties in Switzerland declined – CHF 3.1 billion versus CHF 3.4 billion in 2013 – although since the January 15 decision, interest in Swiss property has grown again.  This is not only a Swiss phenomenon because, as Jones Lang notes, in 2014 worldwide property sales increased by USD 112 billion with sovereign wealth funds, pension funds, and insurers leading the demand.

The residential real estate market was already slowing last year due to government efforts to lower housing debt (from the current 90 percent of household debt) and to create more stringent regulations for mortgages. Apartment prices were up only 2.15 percent in 2014, the lowest annual increase since 2006.  Single-family homes increased by 1.08 percent in 2014, again much less than the average annual increases of 4 percent from 2009-13.

With the higher value franc, domestic demand for buying a home may increase slightly, but it will be more difficult for foreigners to buy who face various legal restrictions in addition to a local currency that is appreciating against most others.

What happens next to the franc and the euro in 2015 is unclear. Goldman Sachs which had been bullish on the euro while the franc was pegged to it has changed its opinion.  Over the next 12 months, the bank expects the euro to fall to 0.95 of the franc’s value, recognising “that the safe haven status of the Swiss Franc has emerged stronger from recent developments.”