## _cr09164 ## Source details **Canonical URL:** [_cr09164](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09164.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09164.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09164.pdf.json) --- ### Executive Summary — Focus, outlook, and policy priorities - Focus: Impact of the global crisis, measures to manage associated risks and vulnerabilities, and macro-financial linkages and spillovers. - Context and pre-crisis fundamentals: - Real GDP growth averaged 3 percent from 2004 to 2007. - Potential growth was about 2 percent. - Inflation muted at 1 percent. - Current account surplus peaked at 14.5 percent of GDP in 2006. - Capacity utilization was 87 percent. - Unemployment fell under 2½ percent. - Fiscal rule resulted in budgetary surpluses in 2006–07 of some 2 percent of GDP. - Financial-sector impact and real economy: - Two large banks saw large write-downs and losses; in 2008 total revenues at the two big banks fell by 81 percent. - Investment and bank financial service income in the balance of payments declined by over 80 percent in 2008. - Swiss equity index fell by about 40 percent over last year (relative to the report). - Financial intermediation value added declined by about 7½ percent. - Economy entered recession in H2 2008; real GDP contracted by 0.2 percent in H2 2008 despite a 1.6 percent expansion in 2008 overall. - Exports growth slowed from 9½ percent in 2007 to under 2½ percent in 2008. - Growth outlook and forecasts: - Staff expects the economy to shrink by 3 percent in 2009, before picking up again in the second half of 2010. - Mission-time staff earlier expected Swiss GDP to contract by 2.3 percent in 2009 and hover around zero in 2010; subsequent deterioration led to a revised forecast of -3.0 percent in 2009 and -0.3 percent in 2010. - Government (SECO) forecast more positive; SNB estimated a contraction between -2.5 and -3.0 percent in 2009. - Inflation and deflation risks: - Inflation (y-o-y) peaked in July 2008 at 3.1 percent. - Headline inflation dropped to -0.4 percent in March (relative to the report). - Staff projects inflation to reach -0.6 percent in 2009. - Core inflation remained above 1¼ percent at mission time; deflationary risks had increased. - Monetary policy stance: - SNB loosened monetary policy, bringing policy rates almost to zero; implemented quantitative easing with purchases of private sector paper and unsterilized foreign exchange intervention; active supplier of liquidity. - Fiscal policy stance: - Crisis and two fiscal stimulus packages will result in a deficit after years of surpluses. - Further fiscal stimulus appropriate to support demand, but should not put at risk sustainability given significant contingent liabilities. - Financial sector policy stance: - Authorities implemented comprehensive stabilization measures addressing capital, assets, and liquidity; pushed for early recapitalization of UBS; extended deposit insurance; negotiated new capital and liquidity buffers for large banks; stepped up supervision. - Downside risks sizeable; baseline assumes contraction similar to euro area given that 63 percent of Swiss exports are to European countries. - Policy priorities: - Early detection and addressing of potential problems to avoid large-scale rescue packages with major fiscal implications. - Tight regulation and effective supervision of the financial sector. - Cross-border coordination for systemically important institutions. *IMF staff mission and report summary as presented in the Executive Summary.* ### Box 1 — Macro-Financial Linkages and Spillovers: key findings and channels - Financial sector size and contribution: - Financial intermediation accounted for about 9 percent of GDP in 2008 (12 percent including insurance and pensions) and 5½ percent of employment. - Financial intermediation directly contributed about 1 percentage point to Swiss real GDP growth annually between 2004 and 2007. - Growth in banking sector assets and financial sector value added correlation: 0.75. - In 2008: banking systems’ total assets fell by 10.4 percent; financial sector VA fell by 7.2 percent; drop in banking assets placed direct downward pressure on growth of about 1.4 pp. - VAR evidence on spillovers: - A 1 percent contraction in financial intermediation VA reduces real GDP over the next 4–6 quarters by about ½ pp. - A 7.2 percent decline in financial intermediation could result in a 3.5 pp decline in real GDP growth within a year. - Staff note: the 3.5 pp reduction aligns with the projected swing from +1.6 to -3.0 percent. - Exchange rate, safe-haven flows, and equity volatility: - Franc appreciated by 8 percent against the euro over a few months, reaching less than SFr 1.45 per euro at end-October 2008; later pushed above SFr 1.57 per euro by mid-December and declined to 1.47 leading up to the SNB policy meeting. - Implied volatilities, 3 months, jumped in late 2008 (source: Bloomberg; SNB). - Credit conditions: - Little evidence of a domestic credit crunch: SNB survey of 20 major banks indicated most had not tightened lending conditions. - Domestic private sector credit growth down 6 percentage points from its 2007 peak to 3.8 percent year-on-year in February. - Private household demand for credit slowed; absence of a housing bubble; resurgent Pfandbrief market supported credit supply. - External credit conditions tightened in trading partner economies. - Financial sector balance-sheet risks and contingent fiscal liabilities: - Deleveraging reduces assets that generate VA; balance sheet shocks imply sizable contingent fiscal liabilities. - April 2009 GFSR indicated Switzerland’s financial system systemically vulnerable to shocks from other international centers. - External stability and current account: - Exports declined by 8 percent in real terms in 2008Q4 and by 14 percent in the first two months of 2009. - Pharmaceuticals and chemicals ~1/3 of exports and remained relatively stable; raw/semi-finished materials and luxury goods demand fell sharply. - Investment income fell by 83 percent as banks’ direct investment income cut with subsidiaries reporting persistent losses. - Overall current account surplus declined by 33 percent since 2006 and stood at 9.1 percent of GDP in 2008. - WEO projects surplus to remain under double digits as financial sector activity declines and investment banks restructure. - CGER valuation: - Equilibrium exchange rate approach: overvaluation of about 1 percent. - Two current-account based approaches: undervaluation of about 1 and 9 percent respectively (Fall 2008 CGER). - Net average of three methods: franc broadly in equilibrium; more pessimistic scenarios could imply exchange rate on the strong side. - Authorities’ crisis response (liquidity, stabilization, guarantees): - SNB extended maturities on refinancing (from Dec 2007), cooperated with ECB to auction U.S. dollar liquidity via Fed swap lines, offered Swiss francs through swap arrangements with ECB and National Bank of Poland (late 2008), with National Bank of Hungary and the Fed (early 2009). - Issued SNB bills in U.S. dollars to finance the Stabilization Fund and in Swiss francs to mop up excess liquidity. - Three-month Libor-OIS spreads show interbank tensions declined since October (source: Bloomberg; IMF staff estimates). - Financial sector stabilization measures: - UBS: transfer of $39 billion (8½ percent of GDP) of distressed assets to SNB-sponsored SPV; capital injection of SFr 6 billion from Swiss Confederation in mandatory convertible notes. - Credit Suisse: SFr 10 billion capital increase placed with major global investors; did not participate in asset purchasing plan. - Government ready to take further action if needed; indicated willingness to guarantee new medium-term bank borrowings if necessary (no guarantees given to date). - Outstanding risks: further losses, including on banking book risks, may create need for new intervention including capital injections and shareholder dilution. *Source: Box 1. Macro-Financial Linkages and Spillovers (_cr09164).* ### Box 3 — Key elements of regulatory reform and supervisory strengthening - Capital adequacy: - Basel II requirements to be strengthened in line with Basel Committee evolving standards. - Increased capital buffers (Pillar 2) above Basel II minimums for two major banks, including cyclical adjustment (by 2013). - Introduction of a minimum leverage ratio, including cyclical adjustment (by 2013). - Redefinition of eligible capital. - FINMA introduced a minimum leverage ratio (core tier 1 capital as percentage of assets excluding domestic lending) and provisions to vary the actual minimum to reflect economic conditions; two banks have until 2013 to comply. - Mission suggested the exclusion of domestic lending from leverage ratio should be reconsidered in future. - Stress-testing: - FINMA developing a “building block approach” to supplement SNB top-down stress tests; initially applied to major banks. - Liquidity: - New liquidity requirements planned for the two large banks in 2009 and to be extended as appropriate. - Funding pressures may prompt market demand for government guarantees; authorities would consider this contingency. - Remuneration: - FINMA to issue guidance on remuneration practices for all regulated entities. - FINMA structure, resources, implementation: - FOPI, SFBC, and Anti-Money Laundering Control Authority merged on January 1, 2009 into FINMA. - FINMA is a public law body, accountable to Federal government but institutionally and financially independent. - FINMA had 315 full-time staff (April 2009) and a 2009 budget equivalent to $88 million. - Authorities plan to increase resources to 355 full-time staff. - Tentative supervisory budget comparator range: $70-190 million (based on comparator metrics). - Interaction with broader issues: - Reforms address capital, stress-testing, liquidity, remuneration; program needs review in light of further international work on macroprudential focus. - Insurance regulation tested; Swiss Solvency Test and Swiss Quality Assessment reforms to show benefits over coming years. - Key statistics cited: - Banking sector’s total on-balance-sheet assets exceeded SFr 4.7 trillion at end-2007 (~over nine times Swiss annual GDP). - BIS data: as of Q3 2008 Swiss banking exposure to emerging market countries close to 50 percent of GDP (second in Europe to Austria); end-2005 exposure was 28 percent of GDP. - Pillar II pension funds total assets around SFr 630 billion at end-2007; average funding ratios estimated to have fallen to around 95 percent from 112 percent at end-2007. - On March 13 (year not specified in excerpt) Switzerland adopted OECD standard on administrative assistance in fiscal matters to permit fuller exchange of information. *IMF staff summary as presented in the source document.* ### Mid-March SNB actions and assessment (Section 40) - SNB inflation forecast and policy rate: - SNB forecasted -0.5 percent inflation for 2009 and zero inflation in period 2010–11. - Libor target range reduced by ¼ percentage point to between zero and 75 basis points. - SNB will target the lower part of the band, a de facto easing of 25 basis points. - Unconventional measures: - Direct purchase of private sector Swiss franc bonds to improve transmission amid unstable risk premia. - Foreign exchange intervention: SNB announced it would buy euros; first FX intervention since 1995. - Swiss franc depreciated by about 4 percent against the euro (to SFr 1.54) on day of SNB announcement. - Fiscal position (recent history and 2008 outcomes): - General government surplus of 2.2 percent of GDP in 2007. - Despite UBS support in 2008, Switzerland’s stock of debt at end-2008 remained about 30–35 percentage points of GDP below Euro area average and Germany, and 20 percentage points below the U.S. - At end-2008 public sector net international asset position of 21 percent of GDP, and 25 percent of GDP in the short-term. - Federal government’s surplus swung into a deficit of 0.4 percent of GDP in 2008; general government recorded a surplus of 0.9 percent of GDP in 2008. - Fiscal projections and stimulus: - Planned fiscal stimulus and full use of automatic stabilizers will result in a general government deficit in 2009. - Federal government’s plan and cantonal measures yield stimulus of about 0.8 percent of GDP; accelerated public investment accounts for ~0.3 percent of GDP including cantonal cofinancing. - Cantonal measures include about half in tax cuts and rebates. - General government deficit expected of 1.6 percent of GDP in 2009. - Authorities may consider additional stimulus for 2010; current measures of ¾ percent of GDP are smaller than those in other European countries. - Long-Term Sustainability Report estimated permanent fiscal consolidation of 1½ to 2 percent of GDP required to stabilize debt at 2003 level. - Financial sector stability and supervision recommendations: - Recent regulatory reforms: higher risk-based capital adequacy requirements with downturn adjustments, minimum leverage ratio, planned more stringent liquidity regulations for large banks. - Recommendation to put extended deposit insurance on sounder footing, including ex ante funding. - Establishment of FINMA an opportunity to strengthen supervision: enhance skills and resources, integrate sectoral approaches, strengthen forward-looking systemic surveillance, cooperate with SNB and foreign regulators. - Continued intensive oversight of large banks (including foreign operations), large (re)insurers, and medium/smaller banks; supervision of smaller banks may require dual approach with auditors and increased on-site FINMA examinations. - Monetary policy appraisal: - Policy interest rates steered toward zero appropriately. - SNB’s March shift to quantitative easing and FX intervention aimed at countering appreciation pressures and limited options to influence monetary conditions further. - Unsterilized FX intervention within floating regime intended to counter disruptive pressures including safe-haven flows and to provide positive spillovers to Eastern European countries. - Once recovery commences, SNB will need to exit quantitative easing and reverse monetary base build-up to protect price stability. - Current account note: - Current account surplus mostly structural; writedowns and declines in investment income will reduce surplus near term. *Source: _cr09164 - 40. At the mid-March meeting after the Article IV mission, the SNB announced.* ### Key macroeconomic indicators and fiscal/externals tables (selected figures) - Area and population: - Total area: 41,293 square kilometers - Total population (end-2007): 7.5 million - Income per capita (2007): - GDP per capita (2007, in US$): 56,837 - GNP per capita (2007, in US$): 57,876 - GDP (percentage changes at constant prices): - 2006: 3.4; 2007: 3.3; 2008: 1.6; 2009: -3.0; 2010: -0.3; 2011: 1.0 - Nominal GDP (billions of Swiss francs): - 2006: 487.0; 2007: 512.1; 2008: 532.1; 2009: 523.6; 2010: 528.2; 2011: 539.3 - Employment and unemployment: - Employment (percent change): 2006: 0.9; 2007: 1.0; 2008: 1.1; 2009: -4.2; 2010: -1.8; 2011: -1.2 - Unemployment rate (percent): 2006: 3.0; 2007: 2.5; 2008: 2.7; 2009: 3.9; 2010: 4.6; 2011: 4.2 - Prices and wages: - CPI: 2006: 1.0; 2007: 0.7; 2008: 2.4; 2009: -0.6; 2010: -0.3; 2011: 0.3 - Nominal wage growth: 2006: 1.6; 2007: 1.8; 2008: 3.3; 2009: 0.3; 2010: 0.9; 2011: 2.3 - General government finances (percent of GDP): - Revenue: 2006: 37.7; 2007: 37.4; 2008: 38.6; 2009: 37.0; 2010: 37.3; 2011: 37.2 - Expenditure: 2006: 36.0; 2007: 35.2; 2008: 37.7; 2009: 38.6; 2010: 38.9; 2011: 38.6 - Balance: 2006: 1.7; 2007: 2.2; 2008: 0.9; 2009: -1.6; 2010: -1.6; 2011: -1.4 - Current account (in percent of GDP): - 2006: 14.5; 2007: 10.1; 2008: 9.1; 2009: 7.6; 2010: 8.1; 2011: 8.9; 2012: 9.9; 2013: 10.9; 2014: 12.0 - Net international investment position projections (percent of GDP): - 2006: 112; 2007: 139; 2008: 143; 2009: 153; 2010: 160; 2011: 166; 2012: 172; 2013: 179; 2014: 186 - Major financial institutions (selected 2008 indicators, in millions of US$ unless noted): - Credit Suisse total assets: 1,170,350; net income: -7,687; total operating income: 12,095; shareholders equity: 32,302; Tier 1 ratio: 13.3 percent; S&P long-term rating: A+ - UBS total assets: 2,015,098; net income: -20,887; total operating income: 1,201; shareholders equity: 32,800; Tier 1 ratio: 11.0 percent; S&P long-term rating: A+ - Swiss Re total assets: 224,789; net income: -810; shareholders equity: 19,167 - Zurich Financial Services total assets: 307,316; net income: 4,860; shareholders equity: 20,713 - SNB balance sheet (total assets, millions of Swiss francs): - 2005: 101,689; 2006: 104,812; 2007: 126,927; 2008: 214,323 - Selected 2008 components: Foreign currency reserves: 47,429; Swiss franc repos: 50,321; U.S. dollar repos: 11,671; Money market, Swiss franc securities, other: 22,324 - Liabilities 2008: Currency in circulation: 49,161; Sight deposits: 51,173; Repo, SNB bills & time liabilities: 53,839; Provisions and equity capital: 58,449 - Financial soundness indicators (selected): - Regulatory capital as percent of risk-weighted assets: 2008: 14.8 - Regulatory Tier I capital to risk-weighted assets: 2008: 12.3 - Non-performing loans as percent of gross loans: 2008: 0.5 - Gross profits as percent of average assets (ROAA) 2008: 0.3; ROAE 2008: 5.4 - Liquid assets as percent of total assets: 2008: 29.2 - Structure of financial system: - Number of banks 2008: 324 - Concentration (share of three largest banks) 2008: 65 - Total banks assets (SFr billions) 2008: 3,080 - Total deposits (SFr billions) 2008: 1,395 *Source: Table compilations and projections in the IMF staff report (selected tables summarized).* ### Appendix I — SNB Stabilization Fund (StabFund): structure and asset transfers - Announcement and purpose: - On October 16, 2008 Swiss Confederation to subscribe to mandatory convertible notes amounting to SFr 6 billion to strengthen UBS capital base. - SNB created SPV (StabFund) to absorb problem assets (“bad bank” model). - Capital injection from government came from structural surplus. - SNB initially procured funds required for transfer via a U.S. dollar–Swiss franc swap with the U.S. Federal Reserve. - Funding and risk allocation: - SPV funded by: a first loss position taken by UBS assumed to cover 10 percent of SPV assets; and a $35 billion non-recourse SNB loan collateralized by fund assets. - Asset transfer scope and valuation: - Transfer reduced from approx $60 billion to approx $39 billion owing to accounting standard amendments. - In two steps SNB StabFund acquired assets equivalent to about $39 billion. - Asset prices determined by SNB based on valuation by third-party experts. - Assets primarily U.S. and European residential and commercial mortgage-backed securities and other asset-backed securities. - Accounting changes and asset exclusions: - Certain assets (structured products backed by student loans and assets wrapped by monoline insurers) withheld from StabFund. - Change to IFRS (IAS39) in October 2008 allowed UBS to reclassify student-loan-backed assets from “held for trading” to “loans and receivables,” producing cost savings via a low impairment charge. - By retaining these assets UBS remains exposed to possible impairment. *Source: Appendix I. The SNB Stabilization Fund (excerpt).* ### Appendix II — Statistical issues, data coverage, and selected indicators - Data system assessment: - Switzerland’s economic and financial statistics adequate for surveillance; timely publication and online documentation. - Switzerland subscribed to SDDS in June 1996; in full observance with flexibility options on production index and wages/earnings periodicity. - Statistical gaps: - Reliable general government finance statistics have considerable lags due to canton and commune reporting delays. - Pension statistics and GDP by industry published with long lags. - Limitations reflect lack of resources and limited authority of Federal Statistical Office (BfS). - Data improvements and new surveys: - From July 2006 SNB conducts monthly survey on cost of borrowing. - Data on financial flows and non-financial assets published in 2007. - End-2007 new monthly SNB survey on interest rates for banking products. - Since 2007 SNB collects Basel II capital adequacy statement information under agreement with SFBC. - Since Q1 2008 SNB collecting qualitative data on lending policies of ~20 banks (temporary, not published). - National accounts and fiscal statistics reform: - Annual national accounts upgraded in 2003 to ESA95. - SECO revised quarterly national account estimates with Q4 2004 data; quarterly production account published from March 2006. - Federal Finance Administration revamping fiscal statistics adopting GFSM2001, HRM2, and NAM; figures under NAM produced for 2007; GFSM2001 may be reported beginning in 2009. - ROSC mission on fiscal transparency took place January 16–29, 2009. - Balance of payments and IIP: - Quarterly BoP and IIP compiled by SNB meet international standards. - Monetary gold transactions not correctly reflected historically due to legal allocation of proceeds; distribution concluded in February 2005. - Switzerland participated in Coordinated Compilation Exercise for FSIs; benchmark FSIs for year-end 2005 posted on IMF website. - AML/CFT and supervisory developments: - Federal law implementing revised FATF Recommendations adopted October 2008, entered into force February 1st 2009. - Supervisory ordinances on private insurances, gaming, banking and non-banking sectors adopted; revised banking association due diligence code in mid-2008. - Swiss authorities reported reforms to FATF in February 2009. - Selected indicator snapshot (selected rows as presented): - Real GDP (percentage changes): 2.5 3.4 3.3 1.6 -3.0 - Real total domestic demand (percentage changes): 1.9 1.4 1.1 0.2 -0.5 - CPI (year average): 1.2 1.0 0.7 2.4 -0.6 - Unemployment rate (percent of labor force): 3.4 3.0 2.5 2.7 3.9 - Gross national saving (percent of GDP): 35.2 36.7 32.3 30.8 28.0 - Trade balance (percent of GDP): 0.6 1.0 1.8 2.7 1.7 - Current account (percent of GDP): 13.6 14.5 10.1 9.1 7.6 - Official reserves (end of year, US$ billion): 36.3 38.1 42.7 ... - Three-month Libor rate (percent): 1.5 1.6 2.2 1.5 ... - Exchange rate regime: Free float; Present rate (May 1, 2009): SwF 1.13 per US$1 *Source: Appendix II. Switzerland: Statistical Issues (IMF staff report and PIN material contained in the provided content).* ### Authorities’ assessment and response (authorities’ statement) - Authorities’ stance: - Thank staff for thorough report; broadly share staff assessment and policy advice; welcome positive assessment of crisis response. - Policy strategies generally intended for implementation only if economic situation deteriorates further or private sector solutions lacking; at this stage authorities do not see need for additional measures. - Macroeconomic and monetary outlook: - Acknowledge recession in H2 2008; expect significant contraction given openness and financial sector importance but note mitigating factors (credit developments favorable through February; no housing bubble). - SNB expectations: headline inflation to remain negative throughout 2009 and average around -0.5 percent for 2009; 2010 inflation around 0 percent with large uncertainties. - SNB actions: early aggressive relaxation to zero-interest-rate floor; additional measures mid-March increasing longer-term repo transactions, purchasing Swiss franc private sector bonds, and buying foreign currency. - SNB providing Swiss-franc liquidity via swap lines: to ECB and National Bank of Poland (since end of last year), since this year to Hungarian central bank and to the Fed. - Rationale for FX purchases: prevent further appreciation that would defeat deflation-countering efforts; aim not to artificially reinforce competitiveness. - Financial sector stability and international cooperation: - Authorities prefer private sector solutions; structures and instruments for additional support in place and optimized. - Banking sector interventions to date focused on UBS: transfer of US$38.7 billion distressed assets to SNB SPV and capital injection of SFr 6 billion; no government guarantees of bank debt or borrowing granted. - Swiss banks’ exposure to emerging markets considered diversified and not significantly more concerning than peers. - SNB and FINMA actively engaged in international cooperation; Switzerland contributes to multilateral efforts. - Regulatory and fiscal stance: - Banks to hold capital well above international standards; capital buffers and leverage requirements to be increased; mandated stress testing introduced for two large banks. - Authorities support full use of automatic stabilizers; combined stimulus from automatic stabilizers and discretionary federal and cantonal measures for 2009 will provide around 1.4 percent of GDP (authorities’ estimate). - Phased approach to fiscal stimulus; additional measures in 2010 would require invoking the escape clause under the “debt brake.” - Authorities emphasize preserving recent fiscal consolidation gains and that entitlement reforms remain key for long-term fiscal sustainability. *Prepared on behalf of the Swiss authorities; text reflects their assessment and policy positions.* *Italicized source: IMF staff report excerpts and authorities’ statements contained in _cr09164.* ### Executive Summary ### _cr09164 - Executive Summary ### Focus and context - Focus: Impact of the global crisis, measures to manage associated risks and vulnerabilities, and macro-financial linkages and spillovers. - Context: - Switzerland entered the crisis with strong macroeconomic, fiscal, and external fundamentals. - The large financial sector was affected early and the real economy is now being hit. - Maintaining financial stability is essential for macroeconomic stability and recovery, but the limited size of the Swiss economy constrains the government’s ability to support the large financial sector, putting a premium on tight regulation, effective supervision, and cross-border coordination. ### Recent developments and near-term outlook - Pre-crisis performance: - Real GDP growth averaged 3 percent from 2004 to 2007. - Potential growth was about 2 percent. - Inflation muted at 1 percent. - Current account surplus peaked at 14.5 percent of GDP in 2006. - Capacity utilization was 87 percent. - Unemployment fell under 2½ percent. - Fiscal rule resulted in budgetary surpluses in 2006–07 of some 2 percent of GDP. - Financial-sector impact and real economy: - The financial sector crisis hit Switzerland hard; UBS was most affected, but both large banks reported write-downs and losses and received multiple capital injections, mostly via preference shares and convertible bonds. - In 2008, total revenues at the two big banks fell by 81 percent. - Investment and bank financial service income in the balance of payments declined by over 80 percent in 2008. - Swiss equity index fell by about 40 percent over last year (relative to the report). - Financial intermediation value added declined by about 7½ percent. - The economy entered recession in the second half of 2008; real GDP contracted by 0.2 percent in the second half of 2008 despite a 1.6 percent expansion in 2008 overall. - Exports growth slowed from 9½ percent in 2007 to under 2½ percent in 2008. - Investment spending contracted since Q2 2008; private consumption grew by 1.7 percent in 2008. - Growth outlook and forecasts: - Staff expects a significant economic decline in 2009 and a pickup in the course of 2010. - The economy is expected to shrink by 3 percent in 2009, before picking up again in the second half of 2010. - At mission time, staff earlier expected Swiss GDP to contract by 2.3 percent in 2009 and hover around zero in 2010; subsequent deterioration led to a revised forecast of -3.0 percent in 2009 and -0.3 percent in 2010. - The government (SECO) forecast was somewhat more positive; the SNB estimated a contraction of between -2.5 and -3.0 percent in 2009. - The slowdown will work mainly through reduced exports and investment; consumption expected to hold up in the first half of 2009 but to lose momentum as unemployment rises. - Potential output: - The precise impact of the financial crisis on potential output growth is uncertain; authorities noted potential growth would be constrained and under purely statistical methodologies potential growth would fall below 1.5 percent. ### Inflation and deflation risks - Headline inflation developments: - Inflation (y-o-y) peaked in July 2008 at 3.1 percent (the highest level in 15 years). - Headline inflation dropped to -0.4 percent in March (relative to the report). - Staff projects inflation to reach -0.6 percent in 2009. - Core inflation remained above 1¼ percent at the time of the mission, but deflationary risks had increased. - Drivers: - Energy and food price movements drove much of headline inflation variation; core rates remained elevated even as energy inflation subsided. ### Monetary and exchange rate policy - The Swiss National Bank (SNB) actions: - The SNB has appropriately loosened monetary policy, bringing policy rates almost to zero. - Implemented quantitative easing with purchases of private sector paper and unsterilized foreign exchange intervention aimed at limiting undue appreciation of the Swiss franc. - The SNB has been an active supplier of liquidity to the market. - Monetary policy stance relaxed aggressively. ### Fiscal policy - Fiscal developments: - The impact of the crisis and two fiscal stimulus packages will result in a deficit after years of surpluses. - Further fiscal stimulus would be appropriate to support demand, but should not put at risk the sustainability of public finances at a time of significant contingent liabilities. ### Financial sector policies and risks - Authorities’ crisis response (2008): - Authorities implemented comprehensive stabilization measures addressing capital, assets, and liquidity, and pushed for early recapitalization of UBS. - Extended deposit insurance, negotiated new capital requirements and liquidity buffers for large banks, and stepped up supervision. - As the global downturn continues, risks remain in both banking and insurance/pensions, and additional support measures may be needed. - Macro-financial linkages: - Switzerland is affected through three channels: stock effect (asset price declines hit bank and insurer balance sheets), flow effect (longer-lasting earnings weakens financial industry earnings), and trade effect (sharp downturn in key trading partners). - Swiss fortunes closely aligned with global financial system health; a fall in equity prices is associated with declines in financial service exports and real growth. - Returns on equity for the two large banks have been good predictors of the future direction of the economy. - Risk characterization: - Downside risks are sizeable and depend on global demand and financial market developments. - Baseline incorporates a contraction similar to the euro zone; 63 percent of Swiss exports are to European countries. - Probabilities of a larger contraction are non-trivial given openness and financial sector size; mitigating factors include economic diversification, aggressive monetary policy, and absence of a housing boom. ### Policy challenge and priorities - Key challenge: determining the optimal policy mix to address further economic weakening while containing financial sector vulnerabilities without imperiling public finances. - Priorities: - Early detection and addressing of potential problems to avoid large-scale rescue packages with major fiscal implications. - Tight regulation and effective supervision of the financial sector. - Coordination and cooperation between home and host country authorities to manage cross-border systemically important institutions. *IMF staff mission and report summary as presented in the Executive Summary.* ### Box 1. Macro-Financial Linkages and Spillovers ### Box 1. Macro-Financial Linkages and Spillovers ### Financial sector size and contribution to growth - Financial intermediation accounted for about 9 percent of GDP in 2008 (12 percent including insurance and pensions) and 5½ percent of employment. - Financial intermediation directly contributed about 1 percentage point (pp) to Swiss real GDP growth (annually) between 2004 and 2007. - Growth in banking sector assets and financial sector value added (VA) correlation: 0.75. - In 2008: - Banking systems’ total assets fell by 10.4 percent. - Financial sector VA fell by 7.2 percent. - The drop in banking assets placed direct downward pressure on growth of about 1.4 pp. ### Macro-financial spillovers to real activity - VAR regression (quarterly data, 1980-2008) finding: - A 1 percent contraction in the value added of financial intermediation reduces real GDP over the next 4-6 quarters by about ½ pp. - Implication: - A 7.2 percent decline in financial intermediation could result in a 3.5 pp decline in real GDP growth (encompassing direct and indirect effects) within a year. - Staff projection alignment: - The 3.5 pp reduction is in line with the staff’s projected swing in Swiss growth rates (from +1.6 to -3.0 percent). - Other real sector shocks (e.g., trade) are also expected to hit the economy but are not included in the VAR estimate. ### Exchange rate, safe-haven flows, and equity market volatility - Increased equity market volatility has resulted in safe haven flows and upward pressure on the Swiss franc. - Exchange rate episodes described: - The franc appreciated by 8 percent against the euro in the span of a few months, reaching less than SFr 1.45 per euro at the end of October 2008, due in part to the unwinding of carry-trades. - A marked reduction of interest rates pushed the rate above SFr 1.57 per euro by mid-December, reversed by early March as the rate declined to 1.47 leading up to the SNB policy meeting. - Clear link noted between exchange rate appreciation and economic growth in recent years. - Currency volatility: - Implied volatilities, 3 months, jumped in late 2008 (source: Bloomberg; and Swiss National Bank). ### Credit conditions and domestic lending - Little evidence of a domestic credit crunch: - SNB survey of 20 major Swiss banks indicated the vast majority had not tightened lending conditions. - Domestic private sector credit is dominated by mortgages. - Decline in domestic private sector credit growth: down 6 percentage points from its 2007 peak to 3.8 percent year-on-year in February (year not further specified in excerpt). - Private household demand for credit, both mortgage and non-mortgage related, has slowed. - Supporting factors for credit supply: - Absence of a housing bubble. - A resurgent Pfandbrief (covered mortgage bond) market which has supported credit supply. - External credit conditions: - Private sector financing costs are rising and lending conditions are becoming stricter in trading partner economies. - Lending survey indicators show tightening credit standards in main export markets (Germany, France, Italy, euro area). ### Financial sector balance-sheet risks and contingent fiscal liabilities - Financial sector deleveraging and shrinkage reduce assets available to generate value added. - Balance sheet shocks imply sizable contingent fiscal liabilities. - April 2009 GFSR indicated Switzerland’s financial system is systemically vulnerable to shocks emanating from other international financial centers. ### External stability — exports, productivity, and current account - Exports and market shares: - Switzerland's goods exports have lost market share in major markets in recent years. - Exports declined by 8 percent in real terms in 2008Q4 and by 14 percent in the first two months of 2009. - Pharmaceuticals and chemicals make up about 1/3 of total exports and have remained relatively stable; demand for raw and semi-finished materials, and luxury goods has fallen sharply. - Labor productivity (GDP over hours worked): - Averaged about one percent from 2002–07, slightly under historical norm of about 1.3 percent. - Over same period, average euro area labor productivity rose by 1.1 percent and U.S. by 1.8 percent. - Current account: - Investment income fell by 83 percent as banks’ direct investment income was cut with subsidiaries reporting persistent losses. - Overall current account surplus declined by 33 percent since 2006 and stood at 9.1 percent of GDP in 2008. - WEO projections: surplus expected to remain under double digits over the next few years as financial sector activity declines and investment banks restructure. - Merchanting receipts expected low due to moderating commodity prices; subdued bank commission and fee income will reduce financial service revenues. - Investment income not expected to quickly return to 2004–07 levels. - CGER valuation assessment: - Equilibrium exchange rate approach suggests an overvaluation of about 1 percent. - Two current account based approaches imply undervaluation of about 1 and 9 percent, respectively (based on Fall 2008 CGER). - Net average of three methodologies suggests the franc is broadly in equilibrium. - A more pessimistic scenario (sizable downside risks) could imply the exchange rate is on the strong side. ### Authorities’ response to the crisis — liquidity, stabilization, guarantees - General assessment: - Authorities moved proactively to reduce crisis impact and stabilize the financial system. - SNB cooperated with other central banks to ensure liquidity in the international interbank market. - Authorities pushed for recapitalization of the two large banks early and introduced measures for UBS in October 2008 to relieve pressures without weakening capital adequacy. - Deposit insurance arrangements were enhanced. - Swiss regulators have taken a lead in developing tighter financial sector regulation. - Interbank liquidity actions: - SNB extended maturities on refinancing operations starting December 2007. - Cooperated with the ECB in auctioning U.S. dollar liquidity obtained via swap lines with the U.S. Fed. - Offered Swiss francs through swap arrangements with the ECB and the National Bank of Poland in late 2008, and in early 2009 with the National Bank of Hungary, to avoid offshore Swiss franc market tensions. - Issued SNB bills in U.S. dollars to finance the Stabilization Fund, and in Swiss francs to mop up excess liquidity from domestically oriented banks. - Three-month Libor-OIS spreads show interbank tensions declined since October (source: Bloomberg; IMF staff estimates). - Financial sector stabilization package (UBS and Credit Suisse): - UBS measures: - Transfer of $39 billion (equivalent to 8½ percent of GDP) of distressed assets to an SNB-sponsored special purpose vehicle. - Capital injection of SFr 6 billion from the Swiss Confederation into UBS; funds came from budgetary surpluses and did not require additional borrowing. - Government’s stake is in the form of mandatory convertible notes, with intent to sell before conversion. - Credit Suisse measures: - Did not participate in asset purchasing plan. - Undertook a SFr 10 billion capital increase, placed with major global investors. - Government stance: - Ready to take further action if needed; indicated willingness to guarantee new medium-term bank borrowings of Swiss banks in the capital market if necessary (no guarantees given to date). - Authorities would seek private sector solutions first; mission welcomed efforts to channel funds from small banks to larger banks through the covered bond market. - Outstanding risks: - Further losses, including on banking book risks (not addressed by stabilization measures to date), may create need for new intervention, including capital injections accompanied by shareholder dilution. ### Financial safety net, deposit insurance reform, and supervision - Bank resolution and insolvency framework: - Switzerland has a developed framework. - Government reformed law applying to insolvency of banks and securities dealers in line with April 2008 FSF recommendations. - Regulatory authority has extensive intervention powers and oversees insolvency proceedings. - 2008 application: arrangements used successfully for small Swiss subsidiary of a foreign bank. - Deposit insurance changes and review: - Pre-crisis system limitations: could only protect smaller depositors at small and medium-sized banks; coverage limited, overall capped, financing ex post, potential payout delays. - December 20, 2008 changes: - Protected coverage raised to SFr 100,000 per depositor from SFr 30,000 previously. - Overall cap on system-wide liabilities raised to SFr 6 billion from SFr 4 billion. - Comparison notes: - Coverage broad and comparable to U.S. and U.K., but limit per depositor is less than that temporarily imposed in the U.S. - Table excerpts (comparison of deposit insurance schemes — values preserved): - Switzerland: Coverage — All deposits held in accounts in the name of the bank client. Limit — SFr 100,000 per depositor per bank. Cap on system-wide liabilities — SFr 6 billion. Amount of Preferential Deposits — SFr 353 billion (71 percent of GDP). - Germany: Coverage — All household deposits. Limit — None. Cap on system-wide liabilities — 2/. Amount of Preferential Deposits — EUR 1,733 billion (69 percent of GDP). - U.K.: Coverage — Customer deposits, insurance and home finance deposit, long-term insurance, and mandatory insurance accounts. Limit — GBP 50,000 per person on deposits, GBP 48,000 on insurance and home finance, less for long-term insurance. Cap on system-wide liabilities — None. Amount of Preferential Deposits — Not available. - U.S.: Coverage — All checking accounts, all deposit accounts except certain retirement accounts and excluding investment accounts in stocks, bonds, mutual funds. Limit — Full coverage for checking accounts until end-2009, up to $250,000 for all other accounts until end-2009. Cap on system-wide liabilities — None. Amount of Preferential Deposits — Not available. - Federal Council initiated a fundamental review of the system, due for completion later this year (year not specified in excerpt). Mission welcomed the review and noted the importance of containing contingent liabilities for government; blanket deposit guarantees would not have been credible in Switzerland where deposits are about six times GDP. - Regulation and supervision enhancements: - Supervisors intensified oversight of major banks early in the crisis and extended approach to insurance companies. - Extensive regulatory reforms are being introduced, to take effect, where appropriate, when the crisis is over to avoid reinforcing the downturn but to signal tougher future regulation. - Authorities will balance participation in international regulatory work (e.g., FSF, Basel Committee) with readiness to implement measures appropriate to the Swiss financial sector. - Stronger lead in international cooperation on supervision of major groups in response to limitations highlighted during the crisis. *Source: Box 1. Macro-Financial Linkages and Spillovers (_cr09164).* ### Box 3. Key Elements of Regulatory Reform in Switzerland ### Box 3. Key Elements of Regulatory Reform in Switzerland ### Capital adequacy - Basel II requirements to be strengthened in line with the Basel Committee’s evolving standards. - Increased capital buffers (under Pillar 2) above the Basel II minimum requirements for the two major banks, including a cyclical adjustment (by 2013). - The introduction of a minimum leverage ratio, including a cyclical adjustment (by 2013). - A redefinition of eligible capital. - For the large banks FINMA has introduced a minimum leverage ratio (core tier 1 capital as a percentage of assets excluding domestic lending) and provisions to vary the actual minimum required of banks to reflect economic conditions. - The two banks have until 2013 to comply, with a longer deadline possible. - By applying Basel II and leverage ratios together, with higher requirements in “good times”, FINMA expects to address both the procyclicality of existing risk-based requirements and incentives created by leverage ratios for banks to increase risk assets and off-balance sheet business. - The authorities noted that by defining “good times” by reference to profit cycles of individual banks, they have ensured that adjustments will be automatic and independent of judgmental estimates of the economic cycle. - The mission suggested that the exclusion of domestic lending from the leverage ratio calculation, while necessary in current economic circumstances, should be reconsidered in the future. The authorities noted they would do so, particularly if a minimum leverage ratio were introduced by the Basel Committee. ### Stress-testing - FINMA is developing a “building block approach” to supplement the existing top down stress tests conducted by the SNB. Results will inform management discussions and can be input in capital adequacy decisions. - FINMA will apply the new stress test approach initially to the major banks only, and extend to other banks in due course depending on experience with the major banks. ### Liquidity - New requirements are planned for the two large banks in 2009 and will be extended as appropriate to other banks. - Funding pressures for the large banks require close monitoring. Given that demand for bank term debt has largely disappeared, markets may demand some form of government guarantee—a contingency the authorities would consider, as announced in the October package of stabilization measures—to secure short-term financing of the two large banks. - The shift of deposits from the large to the smaller banks within the system has added to liquidity concerns. ### Remuneration - FINMA will issue guidance on remuneration practices. - Planned FINMA guidance on remuneration, helpful in the context of controlling investment banking risks, will apply to all regulated entities. ### FINMA structure, resources, and implementation stance - The Federal Office of Private Insurance (FOPI), the Swiss Federal Banking Commission (SFBC) and the Anti-Money Laundering Control Authority were merged on January 1, 2009 under a long-planned reform. - FINMA is a public law body, accountable to the Federal government but enjoying institutional and financial independence. - FINMA has 315 full-time staff at present (April 2009) and a budget in 2009 equivalent to $88 million. - The authorities noted that FINMA will increase total resources to 355 full-time staff, while emphasizing the need for the appropriate level of skills and experience. - The mission welcomed the planned strengthening of staffing and noted that FINMA currently has somewhat light resources compared with those of other integrated regulators. - Based on the supervisory budgets of integrated financial sector supervisors in similar industrial countries, and using the size of assets under supervision and the degree of concentration of the sector as comparator metrics, the supervisory budget for Switzerland could be expected to fall within a range of $70-190 million. This tentative calculation abstracts from differences in responsibilities and operating procedures among supervisors. ### Interaction with broader regulatory and financial stability issues - FINMA’s reforms address capital, stress-testing, bank liquidity, and remuneration, in some cases extending work started before the financial crisis. - The reforms are addressing weaknesses in regulation and respond to the international reform agenda, but the program needs to be kept under review in light of further international work (for example on developing a macroprudential focus to regulation). - Insurance regulation is being tested by the crisis. Major reforms since the sector’s problems in 2001–03 have strengthened balance sheets and helped equip FINMA to manage the crisis, but full benefits of reforms (including the Swiss Solvency Test and the Swiss Quality Assessment) will be felt over coming years. - Authorities have resorted to intensive monitoring of existing solvency standards and “tied assets” (those backing reserves), are responding to solvency and liquidity pressures, and have stepped up cooperation with foreign supervisors of major groups. - The authorities emphasized that planned FINMA guidance on remuneration will apply to all regulated entities. ### Key statistics and risk indicators cited - The banking sector’s total on-balance-sheet assets (at the group level) exceeded SFr 4.7 trillion at end-2007 or over nine times the size of Swiss annual GDP. - Based on BIS data, as of the third quarter of 2008 Swiss banking exposure to emerging market countries was close to 50 percent of GDP—in Europe, second only to Austria. At end-2005, Swiss emerging market exposure had been only 28 percent of GDP. - FINMA had 315 full-time staff at present (April 2009) and a budget in 2009 equivalent to $88 million; authorities plan to increase total resources to 355 full-time staff. - Pillar II pension funds had total assets of around SFr 630 billion at end-2007. - Average funding ratios for Pillar II pension funds are estimated to have fallen to around 95 percent from 112 percent at end-2007. - On March 13, Switzerland adopted the OECD standard on administrative assistance in fiscal matters, which will permit a fuller exchange of information with foreign tax authorities. *IMF staff summary as presented in the source document.* ### 40. At the mid-March meeting after the Article IV mission, the SNB announced ### _cr09164 - 40. At the mid-March meeting after the Article IV mission, the SNB announced ### Monetary policy actions and SNB assessment - SNB forecasted -0.5 percent inflation for 2009 and zero inflation in the period 2010–11. - Libor target range was reduced by ¼ percentage point to between zero and 75 basis points. - The SNB will target the lower part of the band (as opposed to the usual middle point), a de facto easing of 25 basis points. - To improve transmission amid unstable risk premia, the SNB decided to directly purchase private sector Swiss franc bonds. - To counter inappropriate tightening of monetary conditions, the SNB announced it would buy euros on foreign exchange markets; this was the first foreign exchange intervention since 1995. - The Swiss franc depreciated by about 4 percent against the euro (to SFr 1.54) on the day of the SNB announcement. ### Fiscal developments (recent history and 2008 outcomes) - General government surplus of 2.2 percent of GDP in 2007. - Despite UBS support in 2008, Switzerland’s stock of debt at end-2008 remained about 30–35 percentage points of GDP below the Euro area average and Germany, and 20 percentage points below the U.S. - At end-2008, the public sector had a net international asset position of 21 percent of GDP, and 25 percent of GDP in the short-term. - In 2008 the federal government’s surplus swung into a deficit of 0.4 percent of GDP (UBS support and accounting adjustments were less than fully offset by early payments and lagged revenue effects). - Continued surpluses at other levels of government allowed the general government to record a surplus of 0.9 percent of GDP in 2008. - Structural surpluses at both the general and federal government levels were broadly unchanged in 2008. ### Fiscal projections and policy measures - Planned fiscal stimulus and full use of automatic stabilizers will result in a general government deficit in 2009. - The federal government’s plan (cancelling deferred corporate tax liabilities, bringing forward investment spending, cantonal cofinancing) and additional cantonal measures will result in a fiscal stimulus of about 0.8 percent of GDP. - Accelerated public investment plans account for about three-quarters of the federal stimulus, amounting to 0.3 percent of GDP including cantonal cofinancing. - Cantonal stimulus measures include about half in tax cuts and rebates. - Apart from unemployment insurance, the impact of automatic stabilizers would be relatively limited; automatic stabilizers and planned fiscal stimulus will lead to significant deterioration in government balances. - Deficits are expected for federal as well as cantonal, municipal, and social security budgets. - At the general government level, a deficit of 1.6 percent of GDP is expected. - The authorities will consider an additional stimulus for the 2010 budget; current measures of ¾ percent of GDP are smaller than those envisaged in other European countries. - A package similar in size to the 2009 one would bring the average stimulus closer to the European average. - Potential targeting options: one-off payments to low-income households (high multipliers) followed by more sustained public investment. - New initiatives would require use of the escape clause under the debt brake rule (extended to include extraordinary expenditures from 2010) and coordination with cantonal governments. - Personal and corporate income tax reforms are expected to widen structural deficits starting in 2011. - The Long-Term Sustainability Report estimated a permanent fiscal consolidation of 1½ to 2 percent of GDP would be required to stabilize the stock of debt at its 2003 level. - A temporary VAT increase to finance deficits in disability insurance is subject to approval in a September referendum; parliament requested a proposal for comprehensive reform of the disability insurance system by end-2010. - Parliamentary approval is pending for an increase in women’s retirement age from 2014, after which more fundamental pension reform will be considered. ### Financial sector stability and regulatory measures - The size of the Swiss financial sector and its global role call for a clear focus on ensuring financial stability. - Constraints: size of the Swiss economy and limited public sector resources constrain ability to support the financial sector without incurring unsustainable liabilities; market-based support mechanisms are constrained by high concentration in the banking sector. - Authorities’ actions to date: relaxed policy mix, injected liquidity, introduced measures to address risks to banking system stability (creation of bank stabilization fund, enhancements to deposit insurance, new capital adequacy targets, initiatives to channel funds to banks needing liquidity). - Further policy action—including capital injections and government guarantees—may be required if turmoil continues. - Banks remain highly leveraged despite asset shedding and hold distressed assets; system significantly exposed to creditors in emerging market countries. - Earnings streams under pressure as credit demand falters and private banking/wealth management revenues slow. - Life insurance companies and pension funds affected by lower asset prices. - Smaller and medium-sized banks have benefited from cash outflows from larger banks, but strong liquidity at these firms creates some risk of less prudent lending. - Recent regulatory reforms: innovative capital regulation for large banks—higher risk-based capital adequacy requirements that adjust to downturns and a minimum leverage ratio—and planned more stringent liquidity regulations for large banks. - Recommendation to put the recently extended deposit insurance regime on a sounder footing, including introduction of ex ante funding. - Establishment of new integrated supervisor (FINMA) is an opportunity to strengthen supervision: enhance skills and resources, integrate sectoral approaches, strengthen forward-looking systemic surveillance, develop strong supervisory style in cooperation with the SNB and foreign regulators. - Need for continued intensive oversight of large banks (including foreign operations), the large (re)insurance sector, and medium-sized and small banks. - Supervision of smaller banks may require further development of the dual approach (with auditors) and increased on-site examination by FINMA. - Need to continue strengthening pension fund supervision (by cantons) in line with earlier recommendations. ### Staff appraisal and policy recommendations - The global crisis will result in a significant decline in growth; the economy entered a recession in the second half of 2008, and positive growth is expected to return in the course of 2010. - Safeguarding financial stability is essential for a return to growth; strong, effective regulation and supervision are required with focus on monitoring vulnerabilities, early identification/response to risks, and contingency planning. - An additional temporary fiscal stimulus is recommended that does not undermine long-term fiscal sustainability. - Room existed for the announced discretionary spending measures of about ¾ percent of GDP in 2009 due to a low stock of debt and previous surpluses. - Full use of automatic stabilizers and flexible application of debt brake rules should help limit procyclical tightening impulses. - Further stimulus in 2010 could be similar in size to 2009, but should be temporary, well targeted, and mindful of bond market sensitivity and the need to preserve room for possible financial sector support. - Long-term entitlement reforms should remain on the authorities’ agenda. - On monetary policy: policy interest rates have been appropriately steered toward zero as growth prospects and inflationary expectations declined. - Rising risk premia and persistent currency appreciation due to safe-haven flows caused undesirable tightening in monetary conditions. - SNB’s shift to a quantitative easing track in March—including intervention in currency markets to stem further appreciation pressures—reflects limited options to further influence monetary conditions. - Unsterilized foreign exchange intervention within Switzerland’s floating regime should be aimed at countering disruptive pressures, including those caused by safe haven flows; such intervention would provide some positive spillovers, including for Eastern European countries. - Once recovery commences, the SNB will need to exit quantitative easing and reverse the build-up in monetary base to protect price stability. - Current account surplus is mostly structural, reflecting high per capita income, an aging population, and Switzerland’s position as an international financial centre; writedowns and declines in investment income will reduce the surplus in the near term. *Source: _cr09164 - 40. At the mid-March meeting after the Article IV mission, the SNB announced* ### 55. It is recommended that the next Article IV consultation be held on the standard 12 ### _cr09164 - 55. It is recommended that the next Article IV consultation be held on the standard 12 ### IMF recommendation - It is recommended that the next Article IV consultation be held on the standard 12 month cycle. ### Key macroeconomic indicators (Table 1: Basic Data) - Area and population - Total area: 41,293 square kilometers - Total population (end-2007): 7.5 million - Income per capita (2007) - GDP per capita (2007, in US$): 56,837 - GNP per capita (2007, in US$): 57,876 - GDP (percentage changes at constant prices) - 2006: 3.4 - 2007: 3.3 - 2008: 1.6 - 2009: -3.0 - 2010: -0.3 - 2011: 1.0 - Nominal GDP (billions of Swiss francs) - 2006: 487.0 - 2007: 512.1 - 2008: 532.1 - 2009: 523.6 - 2010: 528.2 - 2011: 539.3 - Employment and unemployment - Employment (percent change): 2006: 0.9; 2007: 1.0; 2008: 1.1; 2009: -4.2; 2010: -1.8; 2011: -1.2 - Unemployment rate (in percent): 2006: 3.0; 2007: 2.5; 2008: 2.7; 2009: 3.9; 2010: 4.6; 2011: 4.2 - Prices and wages - GDP deflator: 2006: 1.7; 2007: 1.8; 2008: 2.2; 2009: 1.4; 2010: 1.2; 2011: 1.1 - Consumer price index: 2006: 1.0; 2007: 0.7; 2008: 2.4; 2009: -0.6; 2010: -0.3; 2011: 0.3 - Nominal wage growth: 2006: 1.6; 2007: 1.8; 2008: 3.3; 2009: 0.3; 2010: 0.9; 2011: 2.3 - General government finances (in percent of GDP) - Revenue: 2006: 37.7; 2007: 37.4; 2008: 38.6; 2009: 37.0; 2010: 37.3; 2011: 37.2 - Expenditure: 2006: 36.0; 2007: 35.2; 2008: 37.7; 2009: 38.6; 2010: 38.9; 2011: 38.6 - Balance: 2006: 1.7; 2007: 2.2; 2008: 0.9; 2009: -1.6; 2010: -1.6; 2011: -1.4 - Cyclically adjusted balance: 2006: 1.2; 2007: 1.0; 2008: -1.6; 2009: -1.5; 2010: -1.0; 2011: -0.8 - Structural balance: 2006: 0.5; 2007: 0.7; 2008: 0.6; 2009: -1.6; 2010: -1.2; 2011: -1.0 - Gross debt: 2006: 47.5; 2007: 44.3; 2008: 41.6; 2009: 43.8; 2010: 45.0; 2011: 45.5 ### External sector and balance of payments (Table 2) - Current account (levels, in billions of U.S. dollars) - 2006: 7 - 2007: 15 - 2008: 24 - 2009: 40 - 2010: 43 - 2011: 48 - 2012: 54 - 2013: 62 - 2014: 69 - Current account (in percent of GDP) - 2006: 14.5 - 2007: 10.1 - 2008: 9.1 - 2009: 7.6 - 2010: 8.1 - 2011: 8.9 - 2012: 9.9 - 2013: 10.9 - 2014: 12.0 - Trade balance (in percent of GDP): 2006: 1.0; 2007: 1.8; 2008: 2.7; 2009: 1.7; 2010: 1.6; 2011: 1.6; 2012: 1.6; 2013: 1.6; 2014: 1.7 - Exports of goods and nonfactor services (in percent of GDP) - 2006: 38.1; 2007: 40.4; 2008: 40.6; 2009: 35.4; 2010: 35.2; 2011: 37.1; 2012: 39.2; 2013: 41.7; 2014: 44.4 - Imports of goods and nonfactor services (in percent of GDP) - 2006: -37.1; 2007: -38.6; 2008: -37.9; 2009: -33.7; 2010: -33.5; 2011: -35.4; 2012: -37.6; 2013: -40.1; 2014: -42.7 - Net investment income (in percent of GDP): 2006: 10.4; 2007: 4.3; 2008: 1.9; 2009: 1.9; 2010: 2.3; 2011: 2.8; 2012: 3.4; 2013: 4.2; 2014: 4.8 - Private capital and financial account (in percent of GDP): 2006: -14.5; 2007: -9.5; 2008: -8.4; 2009: -7.6; 2010: -8.1; 2011: -8.9; 2012: -9.9; 2013: -10.9; 2014: -12.0 - Net international investment position (Net IIP, in percent of GDP) projections: 2006: 112; 2007: 139; 2008: 143; 2009: 153; 2010: 160; 2011: 166; 2012: 172; 2013: 179; 2014: 186 - Memorandum items - Official reserves (billions of U.S. dollars, end period): 38.1 (2006); 42.7 (2007) - Reserve cover (months of imports of GNFS): 2.7 (2006); 2.6 (2007) ### Major financial institutions—selected indicators (Table 3) - Credit Suisse (millions of US$ unless otherwise indicated) - Total assets: 2008: 1,170,350 - Net income: 2008: -7,687 - Total operating income 2008: 12,095 - Shareholders equity 2008: 32,302 - Tier 1 ratio (percent) 2008: 13.3 - S&P long-term rating: A+ - UBS - Total assets: 2008: 2,015,098 - Net income: 2008: -20,887 - Total operating income 2008: 1,201 - Shareholders equity 2008: 32,800 - Tier 1 ratio (percent) 2008: 11.0 - S&P long-term rating: A+ - Swiss Re - Total assets 2008: 224,789 - Net income 2008: -810 - Shareholders equity 2008: 19,167 - Zurich Financial Services (in millions of US$) - Total assets 2008: 307,316 - Net income 2008: 4,860 - Shareholders equity 2008: 20,713 - Notes: Sources listed as Company reports; and IMF staff estimates. Table caption: Major Financial Institutions—Key Indicators, 2003–08. ### Swiss National Bank (SNB) balance sheet (Table 4) - Total assets (millions of Swiss francs) - 2005: 101,689 - 2006: 104,812 - 2007: 126,927 - 2008: 214,323 - Selected asset components (2008) - Foreign currency reserves: 47,429 - Swiss franc repos: 50,321 - U.S. dollar repos: 11,671 - Money market, Swiss franc securities, other: 22,324 - Liabilities (2008) - Currency in circulation (banknotes): 49,161 - Sight deposits: 51,173 - Repo, SNB bills & time liabilities: 53,839 - Provisions and equity capital: 58,449 - Memorandum items - NGDP (billions of Swiss francs): 2005: 463.1; 2006: 487.0; 2007: 512.1; 2008: 532.1 - Balance sheet, percent of NGDP: 2005: 21.96; 2006: 21.52; 2007: 24.78; 2008: 40.27 ### General government and federal finances (Tables 5–6) - General government (levels, billions of Swiss francs) - Revenues 2007: 191.5; 2008: 205.6; 2009: 193.8; 2010: 197.1; 2011: 200.8 - Expenditures 2007: 180.2; 2008: 200.6; 2009: 202.0; 2010: 205.3; 2011: 208.2 - Balance 2007: 11.4; 2008: 5.0; 2009: -8.2; 2010: -8.2; 2011: -7.4 - Gross debt 2007: 227.0; 2008: 221.3; 2009: 229.6; 2010: 237.8; 2011: 245.2 - Federal government (Table 6, 2007–12 projections) - Revenues (billions of Swiss francs): 2007: 58.7; 2008: 64.2; 2009: 57.9; 2010: 59.2; 2011: 59.1; 2012: 59.8 - Expenditures (billions of Swiss francs): 2007: 54.2; 2008: 66.0; 2009: 60.4; 2010: 61.4; 2011: 62.7; 2012: 64.2 - Balance (billions of Swiss francs): 2007: 4.6; 2008: -1.9; 2009: -2.5; 2010: -2.2; 2011: -3.6 - Revenue (percent of GDP): 2007: 11.5; 2008: 12.1; 2009: 11.1; 2010: 11.2; 2011: 11.0; 2012: 10.8 - Expenditure (percent of GDP): 2007: 10.6; 2008: 12.4; 2009: 11.5; 2010: 11.6; 2011: 11.6; 2012: 11.6 - Overall balance (percent of GDP): 2007: 0.9; 2008: -0.4; 2009: -0.5; 2010: -0.4; 2011: -0.7; 2012: -0.8 - Structural fiscal balance (memorandum): 2007: 0.3; 2008: 0.6; 2009: -0.5; 2010: -0.3; 2011: -0.5; 2012: -0.7 - Gross debt (percent of GDP): 2007: 23.6; 2008: 22.9; 2009: 23.5; 2010: 23.7; 2011: 23.9; 2012: 24.1 ### International investment position (Table 7) - Foreign assets (millions of Swiss francs) - 2003: 2,189,987; 2004: 2,259,767; 2005: 2,772,036; 2006: 3,068,062; 2007: 3,636,196; 2008: 3,107,662 - Foreign liabilities (millions of Swiss francs) - 2003: 1,657,579; 2004: 1,724,029; 2005: 2,204,280; 2006: 2,523,108; 2007: 2,921,900; 2008: 2,452,086 - Net investment position (millions of Swiss francs) - 2003: 532,408; 2004: 535,738; 2005: 567,756; 2006: 544,954; 2007: 714,296; 2008: 655,576 - Memorandum items (in percent of GDP): Foreign assets 2003: 500; 2004: 501; 2005: 599; 2006: 630; 2007: 710; 2008: 584; Foreign liabilities 2003: 379; 2004: 382; 2005: 476; 2006: 518; 2007: 571; 2008: 461; Net investment position 2003: 122; 2004: 119; 2005: 123; 2006: 112; 2007: 139; 2008: 123 ### Financial soundness indicators (Table 8) - Capital adequacy (banks) - Regulatory capital as percent of risk-weighted assets: 2003: 12.4; 2004: 12.6; 2005: 12.4; 2006: 13.4; 2007: 12.1; 2008: 14.8 - Regulatory Tier I capital to risk-weighted assets: 2003: 13.5; 2004: 13.3; 2005: 13.0; 2006: 13.4; 2007: 11.6; 2008: 12.3 - Asset quality and exposure - Non-performing loans as percent of gross loans: 2003: 1.3; 2004: 0.9; 2005: 0.5; 2006: 0.3; 2007: 0.3; 2008: 0.5 - Sectoral distribution of bank credit to the private sector (percent)—households: 2003: 63.7; 2004: 65.2; 2005: 66.6; 2006: 68.5; 2007: 71.5; 2008: 65.4 - Earnings and profitability - Gross profits as percent of average assets (ROAA): 2003: 0.7; 2004: 0.8; 2005: 0.9; 2006: 0.9; 2007: 0.7; 2008: 0.3 - Gross profits as percent of average equity capital (ROAE): 2003: 11.7; 2004: 14.3; 2005: 18.0; 2006: 17.7; 2007: 15.4; 2008: 5.4 - Liquidity - Liquid assets as percent of total assets: 2003: 26.7; 2004: 24.5; 2005: 24.7; 2006: 25.2; 2007: 27.1; 2008: 29.2 ### Structure of the financial system (Table 9—selected items) - Number of banks: 2003: 342; 2004: 338; 2005: 337; 2006: 331; 2007: 330; 2008: 324 - Concentration (share of three largest banks in total assets of the sector) - 2003: 63; 2004: 66; 2005: 67; 2006: 72; 2007: 71; 2008: 65 - Assets of banking sector (in billions of Swiss francs) - Total banks assets: 2003: 2,237; 2004: 2,491; 2005: 2,846; 2006: 3,194; 2007: 3,458; 2008: 3,080 - Deposits (in billions of Swiss francs) - Total deposits: 2003: 974; 2004: 1,044; 2005: 1,211; 2006: 1,374; 2007: 1,519; 2008: 1,395 *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09164.pdf* ### Appendix I. The SNB Stabilization Fund ### Appendix I. The SNB Stabilization Fund ### Overview of the stabilization initiative - On October 16, 2008, the Swiss Confederation announced it will strengthen the UBS capital base by subscribing to mandatory convertible notes to the amount of SFr 6 billion. - The SNB created an SPV entity (the StabFund) to absorb problem assets (“bad bank” model). - The capital injection from the government came from the structural surplus. - The SNB initially procured the funds required for the transfer of the illiquid assets into the SPV from the U.S. Federal Reserve by means of a U.S. dollar – Swiss franc swap. ### Funding structure and risk allocation - The SPV is funded by: - a first loss position taken by UBS, which is assumed to cover 10 percent of the SPV asset portfolio; and - a $35 billion non-recourse SNB loan—collateralized by the assets of the fund. ### Asset transfer scope and valuation - Owing in particular to amendments made to international accounting standards since the announcement of the stabilization measure, the transfer of assets has been reduced from its original level of approximately $60 billion to approximately $39 billion. - In two steps, the SNB StabFund acquired assets from UBS in the equivalent amount of about $39 billion. - Asset prices were determined by the SNB based on a valuation conducted by third-party valuation experts. - The assets purchased were primarily U.S. and European residential and commercial mortgage-backed securities as well as other asset-backed securities. ### Accounting changes, asset exclusions, and implications for UBS - The SNB and UBS agreed that certain categories of assets (structured products backed by student loans and assets that have been wrapped by monoline insurers) are to be withheld from the StabFund. - The decision to retain the structured products on student loans reflected changes to IFRS accounting standards (IAS39) in October 2008 that made it possible for UBS to reclassify these assets (from “held for trading” to “loans and receivables”). - The re-classification resulted in cost savings from accepting a low impairment charge (in lieu of the 10% equity contribution and possibly an additional write-off at the transfer price agreed by the SNB). - The short-term impact on UBS of retaining these assets is similar to that of the StabFund in that further pressures on net income from mark-to-market losses have been avoided. - By not transferring these assets, UBS remains exposed to possible impairment of the assets. *Source: Appendix I. The SNB Stabilization Fund (excerpt).* ### Appendix II. Switzerland: Statistical Issues ### Appendix II. Switzerland: Statistical Issues ### Assessment of current statistical system - Switzerland’s economic and financial statistics are adequate for surveillance purposes. - Switzerland generally publishes timely economic statistics and posts most of the data and the underlying documentation on the internet. - Switzerland subscribed to the Fund’s Special Data Dissemination Standard (SDDS) in June 1996; metadata are posted on the Dissemination Standards Bulletin Board. - Switzerland is in full observance of SDDS requirements, availing itself of flexibility options on dissemination of production index data (for periodicity and timeliness) and of wages and earnings data (for periodicity). ### Remaining statistical gaps and deficiencies - Reliable general government finance statistics appear with considerable lags, mainly due to delays in compiling fiscal accounts at the level of cantons and communes. - Pension statistics are published with a long lag. - GDP by industry appears with a considerable lag. - These limitations mainly reflect a lack of resources and the limited authority of the Federal Statistical Office (BfS) to request information. ### Data improvements, new surveys, and implementation steps - From July 2006, the SNB conducts the monthly survey on the cost of borrowing. - Data on financial flows and non-financial assets was published in 2007. - Long-run historical time series covering monetary aggregates, capital markets, and the SNB balance sheet were published in conjunction with the SNB’s centennial. - At the end of 2007, the SNB introduced a new monthly survey on interest rates for various banking products. - Since 2007, under an agreement with SFBC, the SNB has been collecting new capital adequacy statement information in accordance with Basel II. - Since 2007, the SNB has conducted surveys of Liechtenstein-based companies when preparing its international investment position. - Since Q1 2008, the SNB has been collecting qualitative data on the lending policies of about 20 banks to assess effects of the financial crisis on domestic bank lending; this supplementary quarterly survey is temporary and not published. ### National accounts, EU harmonization, and fiscal statistics reform - Annual national accounts were upgraded in 2003 to the European System of Accounts 1995 (ESA95). - With the release of Q4 2004 data, SECO revised its quarterly national account estimates and, from March 2006, started publishing a quarterly production account. - Main innovations in the new national accounts: more detail on investment (information and communications technology), reclassification of hospitals to private sector in consumption, and use of chain price indices (without adjustment for quality). - In 2004, a statistical cooperation agreement with the EU (as part of Bilateral II) was concluded for harmonization of several Swiss statistics with EU standards. - The Federal Finance Administration began revamping fiscal statistics adopting the Government Finance Statistics Manual 2001 (GFSM2001), reforming accounting standards for cantons and communes (Harmonisiertes Rechnungslegungsmodell der Kantone HRM2), and introducing full accrual budgeting and accounting at the federal level (Neues Rechnungsmodell Bund NAM) along the lines of IPSAS. - Figures according to the new accounting standards have been produced for the federal government (NAM) 2007 and for some cantons (HRM2) for 2009. Figures according to GFSM2001 may be reported beginning in 2009. - A ROSC mission on fiscal transparency took place during January 16–29, 2009. ### Balance of payments, international investment position, and FSIs - Quarterly balance of payments and international investment position data are compiled by the SNB and meet international standards. - Monetary gold transactions relating to sales of gold reserves not required for monetary policy purposes have not been correctly reflected in the balance of payments: for legal reasons, until the distribution of the proceeds between the SNB and the Federal Department of Finance was concluded in February 2005 the proceeds not needed for monetary purposes were considered part of official reserves; after that date they appear in the position “other assets of the SNB” in the balance of payments. - Switzerland participated in the Coordinated Compilation Exercise for Financial Soundness Indicators (FSIs). Data and metadata on a benchmark set of indicators for year-end 2005 have been posted on the IMF website. ### AML/CFT and supervisory developments - Authorities have made progress in completing implementation of the FATF AML/CFT recommendations. - Federal law implementing the revised FATF Recommendations was adopted by the Swiss Parliament in October 2008 and entered into force on February 1st 2009. - Supervisory ordinances on private insurances, gaming, banking and non-banking sectors have been adopted; a revised banking association due diligence code came into force in mid-2008. - The Swiss authorities last reported these reforms to the FATF in February 2009. ### Table of Common Indicators Required for Surveillance (As of April 29, 2009) — selected metadata highlights - Exchange Rates: Latest Observation Apr 09; Date Received Apr 09; Frequency of Data D and M; Frequency of Reporting M and M; Frequency of Publication D and M. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Latest Observation Mar 09; Date Received Apr 09; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Reserve/Base Money: Latest Observation Mar 09; Date Received Apr 09; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Broad Money: Latest Observation Mar 09; Date Received Apr 09; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Central Bank Balance Sheet: Latest Observation Mar 09; Date Received Apr 09; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Consolidated Balance Sheet of the Banking System: Latest Observation Mar 09; Date Received Apr 09; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Interest Rates: Latest Observation Mar 09; Date Received Apr 09; Frequency of Data D and M; Frequency of Reporting M and M; Frequency of Publication D and M. - Consumer Price Index: Latest Observation Mar 09; Date Received Apr 09; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Revenue, Expenditure, Balance and Composition of Financing – General Government: Latest Observation 2007; Date Received Sep 08; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A. - Revenue, Expenditure, Balance and Composition of Financing – Central Government: Latest Observation Feb 09; Date Received Mar 09; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Stocks of Central Government and Central Government-Guaranteed Debt: Latest Observation Q4/08; Date Received Mar 09; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. - External Current Account Balance: Latest Observation Q4/08; Date Received Apr 09; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. - Exports and Imports of Goods and Services: Latest Observation Feb 09; Date Received Apr 09; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - GDP/GNP: Latest Observation Q4/08; Date Received Mar 09; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. - Gross External Debt: Latest Observation 2008; Date Received Mar 09; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. ### Selected economic indicators (as presented in the source) - Real economy - Real GDP (percentage changes) 2.53.43.31.6-3.0 - Real total domestic demand (percentage changes)1.91.41.10.2-0.5 - CPI (year average) 1.21.00.72.4-0.6 - Unemployment rate (in percent of labor force) 3.43.02.52.73.9 - Gross national saving (percent of GDP) 35.236.732.330.828.0 - Gross national investment (percent of GDP) 21.622.222.221.720.4 - Public finances (percent of GDP) - Federal government balance 0.11.10.9-0.4-0.5 - General government balance 2/ 0.11.72.20.9-1.6 - Gross public debt 52.747.544.341.643.8 - Balance of payments - Trade balance (in percent of GDP) 0.61.01.82.71.7 - Current account (in percent of GDP) 13.614.510.19.17.6 - Official reserves (end of year, US$ billion) 3/ 36.338.142.7...... - Money and interest rates - Domestic credit (annual average) 4.05.56.27.2... - M3 (annual average) 4.22.42.13.2... - Three-month Libor rate (in percent) 1.51.62.21.5... - Government bond yield (in percent) 2.12.52.92.5... - Exchange rate - Exchange rate regime Free float - Present rate (May 1, 2009) SwF 1.13 per US$1 - Nominal effective exchange rate (1990=100) 109.8 108.4106.1112.4... - Real effective exchange rate (1990=100) 4/ 104.0 101.798.0103.1... *Source: Appendix II. Switzerland: Statistical Issues (IMF staff report and PIN material contained in the provided content).* ### 1. On behalf of the Swiss authorities, I would like to thank the staff for a very thorough ### 1. On behalf of the Swiss authorities, I would like to thank the staff for a very thorough ### Overall assessment and authorities' stance - The Swiss authorities thank staff for a very thorough report, thoughtful and well-balanced analysis, and candid policy recommendations; they consider it a very good standard for Fund Article IV reports, especially in incorporating financial sector issues. - The Swiss authorities broadly share the staff’s assessment and specific policy advice. - Authorities welcome the positive assessment of their response to the financial market turmoil to date. - Policy strategies in many areas, particularly financial sector stability, are wide-ranging but generally intended for implementation only if the economic situation deteriorates further or private sector solutions are lacking. - At this stage, authorities do not see a need for additional policy measures. ### Macroeconomic outlook and recent developments - Recent strong performance was driven by external demand and private consumption; external shocks pushed the Swiss economy into recession in the second half of 2008. - Given openness and importance of the financial sector, Switzerland will experience a significant contraction, though mitigating factors exist: - Credit developments continued to develop favorably through February. - There has been no housing bubble in Switzerland; the construction sector, supported by favorable mortgage rates and rising real housing prices, still experiences a very satisfactory degree of capacity utilization. ### Monetary policy - Deflationary risks are clearly present given the size of the shock and traditionally low inflation in Switzerland. - SNB expectations for inflation: - Headline inflation to remain in negative territory throughout 2009, and to average around -0.5 percent over the year. - For 2010, inflation should hover around 0 percent; it might even be slightly positive, but uncertainties remain very large. - Authorities fully share the staff’s description and appraisal of Swiss monetary policy, including constraints and reasons for the shift to unconventional measures. - SNB actions: - Early and aggressive relaxation of the monetary policy stance; reached the zero-interest-rate floor earlier than other central banks. - In mid-March, three additional measures were taken: increasing the number of longer-term repo transactions, purchasing Swiss franc bonds issued by private sector borrowers, and buying foreign currency on the open market. - Stepped up provision of Swiss-franc liquidity outside Switzerland: foreign banks allowed to participate in SNB’s repo transactions since 1999; since end of last year SNB providing Swiss-franc liquidity via swap lines to the ECB and the National Bank of Poland; since this year to the Hungarian central bank and to the Fed. - Rationale for foreign currency purchases: - Decision aimed to prevent further appreciation of the Swiss franc, which would have defeated efforts to counter deflation risks. - Aim was not to artificially reinforce competitiveness but to limit undue appreciation given limited options (interest rates effectively at zero and widening interest rate differentials). - Exit strategy considerations: - Authorities aware of necessity of an orderly and timely exit from the exceptional monetary policy stance to reduce liquidity and maintain price stability. - SNB has instruments including recently introduced SNB bills. - Exit will have to occur before unemployment ceases to increase, requiring a particular communication effort. ### Maintaining financial sector stability - Authorities broadly share staff view and welcome positive assessment of measures undertaken to support financial system stability. - Authorities recognize uncertainties ahead in financial markets and the real economy; have communicated effectively and proven readiness to act swiftly. - Structures and instruments for additional support are in place and are constantly being optimized. - Preference for private sector solutions whenever possible, given costs of public interventions (fiscal costs and market distortions). - Banking sector interventions to date: - Support for UBS only: transfer of US$38.7 billion of distressed assets to an SNB-sponsored special purpose vehicle, and a capital injection of SFr 6 billion from the Swiss Confederation. - No government guarantees of bank debt or of bank borrowing have been granted; no apparent need so far. - Exposure to emerging markets: - Swiss banks’ exposure to emerging markets is not a significant concern; exposure is not significantly higher than for other small advanced countries and is more diversified, with higher exposure to the Asia/Pacific region where growth rates are still positive. - International cooperation: - Swiss authorities fully agree on importance of international cooperation; aware of systemic importance of the two large Swiss banks and the two largest Swiss (re)insurers. - SNB and FINMA actively involved with foreign counterparts in information exchange and coordination; Switzerland actively contributes to multilateral efforts and international initiatives. - Regulatory reforms and supervision: - Requirement for Swiss banks to hold capital well above international standards will continue. - Capital buffers for the two large banks will be increased further, including a cyclical adjustment; a minimum leverage ratio will have to be observed. - FINMA introduced a regular, mandated stress testing exercise with the two large banks to supplement SNB top-down stress tests. - Initiatives in the insurance sector advanced: Swiss Solvency Test; quality assessment of governance, risk management, and internal controls. - Benefits of FINMA being an integrated supervisory agency are becoming evident. ### Fiscal policy - 2008 fiscal outcomes: - Despite slowdown and measures to stabilize the financial sector, general government continued to register a surplus for the fourth consecutive year. - Surplus of 0.9 percent of GDP stemmed mainly from cantons and municipalities; at the federal level expenditures increased significantly in 2008 because of budgeted extraordinary spending and support for UBS, but much of the increase was compensated by better than expected revenue performance. - Strong fiscal performance has led to a sharp decline in public debt levels, with gross public debt currently at 41.5 percent of GDP. - Outlook and projections: - Uncertainties regarding 2009 and 2010 are significant. - For 2009, authorities currently project a general government deficit of 0.9 percent of GDP, which is lower than the staff’s projection. - Fiscal stimulus and automatic stabilizers: - Switzerland can allow the full use of its automatic stabilizers given strong fiscal performance in recent years. - Combined stimulus from automatic stabilizers and discretionary measures adopted at federal and cantonal level for 2009 will provide around 1.4 percent of GDP. - Authorities note staff’s lower estimate partly reflects different definitions of stimulus measures; underscore caution with cross-country comparisons and methodological uncertainties (e.g., lag of automatic stabilizers). - Authorities emphasize that economic impact of automatic stabilizers aligns with IMF advice: effects are temporary, they kick in when economic activity is low, and they benefit mostly households whose buying power is at risk. - Phased approach and prudence: - Federal authorities have taken a phased approach to additional fiscal stimulus in 2009, with scope depending on expected depth of downturn; measures are selected to be timely, targeted, and temporary. - Authorities will consider additional stimulus in 2010 if outlook deteriorates further, but such a decision would require invoking the escape clause under the fiscal rule (the “debt brake”). - In judging stimulus, authorities weigh effectiveness and avoid compromising recent fiscal consolidation; they seek an adequate balance between strengthening confidence through timely actions and not taking on excessive future liabilities. - Authorities fully share staff’s view that comprehensive reforms of entitlement programs will be key to ensure long-term fiscal sustainability; efforts under the Assessment of the Tasks of Government will be stepped up once economic recovery is on solid grounds. *Prepared on behalf of the Swiss authorities; text reflects their assessment and policy positions.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09164.pdf_