Switzerland Auf Wiedersehen?
Apart from mountain scenery, the Alpine nation is best known for two things: Neutrality and Banking. Both are in trouble.
Over the weekend of March 18th the second largest bank in Switzerland disappeared.
Credit Suisse, a national institution since its founding in 1856, was essentially “rescued” out of existence by a hastily arranged coalition of the Swiss Government, the Swiss Central Bank, and the country’s other large international Bank, the former Union Bank of Switzerland, now known as UBS. By Sunday morning, Credit Suisse was no more, having been absorbed by UBS.
The forced merger wiped out much of the holdings of a large swarth of Credit Suisse investors.
While a bad deal for Credit Suisse investors, it remains unclear whether the deal will be good for UBS and its stockholders. The Government forced the purchase to be concluded overnight before UBS could undertake the usual due diligence to understand and properly value Credit Suisse’s huge and complex balance sheet.
Also unclear is what the long-term consequences of all this will be for Switzerland. One financial institution, UBS, now holds just shy of 50% of all Swiss banking assets. For a country where total banking assets are five times the size of the entire gross national product, this is an unprecedented, and as one commentator termed it, a very “un-Swiss” set of circumstances.
A Very Un-Swiss Incident
Indeed, everything about the whole episode has been “un-Swiss.” Swiss authorities claimed that the late-night shotgun wedding was necessary to prevent a bank run come Monday morning and the likely collapse of Credit Suisse. An event which the Government feared would devastate the reputation of Swiss banking and, by extension, the reputation of Switzerland itself as a country valued for its financial probity and political stability.
But the wider question is whether the Swiss Government’s own actions, and the very need for them in the first place, haven’t already caused such harm. Banking, more than most activities, is based on perception and reputation. This has been especially true for Brand Switzerland. In the aftermath of this debacle, it would be a very sanguine investor indeed who could view Switzerland and its banks with quite the same confidence as before.
And the harm may be spreading. The Swiss Federal Prosecutor’s Office has opened an investigation into the actions surrounding the merger, and one house of the Swiss Parliament has voted to disapprove of the Government’s actions. Given the special emergency powers used by the Government to force the merger, that vote will likely have no legal effect, but in a country where most big political decisions have historically been made by consensus, the vote only contributes to the sense that in this case the Swiss model has not worked.
Swiss Neutrality Also Under Attack
The other pillar of Swiss national identity, Neutrality, may also be on the verge of crumbling.
The Swiss have already joined the West’s financial sanctions against Russia over its invasion of Ukraine. The assets of sanctioned Russian citizens have been frozen. Sanctioned Russian entities are barred from conducting business in Switzerland or via Swiss intermediaries.
Many in Switzerland view this as a de facto end to the centuries old tradition of Swiss neutrality. Russia certainly thinks so, and has placed the country on its official list of “Unfriendly States”.
A Matter of Swiss Arms
And then there is the question of the use of Swiss arms in the war zone. Currently, Swiss law prevents the direct sale of Swiss armaments to warring states and the indirect re-export of such weapons from third countries into war zones. However, in the case of the Ukrainian war, this latter prohibition is being seriously questioned both within and outside of Switzerland.
Earlier this year a committee of the Swiss Parliament voted to allow the re-export of Swiss munitions to Ukraine. The full Parliament has so far failed to agree to this, but Switzerland is under intense pressure from many of its European neighbors and the U.S. to allow such re-export of Swiss arms. It is likely that this question will ultimately be the subject of a national referendum within Switzerland. Current surveys show 55% of the Swiss population would support such a move.
An End to Swiss Exceptionalism?
With its banking reputation seriously compromised and its long tradition of neutrality at a tipping point, it can be argued that the Switzerland the world has known for so long is disappearing. Yes, the beautiful mountains and alpine lakes remain, and its special blend of three European cultures and languages will still enchant; but after a long and profitable run, Switzerland’s special and unique status among the world’s nations may finally be, as they would say in Zurich, Kaputt.
