Bruno Gehrig: Review of the Swiss economy: end-of-year media news
conference
Introductory remarks by Prof Dr Bruno Gehrig, President of the Swiss National Bank, at the
End-of-year Media News Conference, Zurich, 7 December 2001.
* * *
Financial markets characterised by economic slowdown
Development on the financial markets during the current year was characterised by a surprisingly
significant weakening of the economy affecting all the major economic regions around the world. The
slowdown was most pronounced in the US, but Europe is experiencing a considerable setback in
growth as well. Inflationary pressure, already weak, thus eased further. The central banks took
advantage of the rapidly increasing flexibility and lowered their key rates, in some cases down to
historical lows.
Up until the middle of the year, the prevalent opinion in the financial markets was that - buoyed by the
Fed's marked interest rate cuts - the US economy, along with the global economy, would stage a fairly
swift recovery from the deterioration in the technology sector and the associated weak investment
activity. For this reason, the second quarter was characterised by a recovery on most stock markets,
increasing bond yields and a US dollar defying gravity. By mid-year it became clear that the cyclical
decline was likely to be more serious and to last longer. This reversal of opinion led to investors
gradually becoming more risk averse. Equities portfolios were regrouped and invested in the money
market and in bonds. Growing pessimistic sentiment vis-à-vis the economy led to lower capital market
yields, declining stock valuations and a weaker US dollar.
The general pattern of activities on the financial markets was and still is characterised by a marked
parallelism in price fluctuations. On the one hand, this is a reflection of the synchronisation of the
current and expected economic development which has been apparent for several quarters and which
in turn leads to parallel monetary policy reactions. On the other hand, the widespread globalisation of
capital market processes has considerably intensified - at the expense of country-specific
differentiations - the impact of the valuation factors effective worldwide.
The shock of 11 September
The attack of 11 September hit the world economy and the financial markets in a state of instability. It
did not trigger any new trends, but magnified developments which were already under way. Business
and consumer confidence suffered a severe blow, which further dimmed economic prospects in the
US and in Europe. The sudden increase in risk aversion led to drastic corrections on all major stock
exchanges and to a veritable flight into the Swiss franc. The record highs the Swiss franc reached on
21 September went in tandem with the stock markets hitting record lows. In response to the rapid and
marked appreciation of the Swiss franc, we cut interest rates in an extraordinary move on
24 September. Following this step, and in the course of a broader normalisation of the financial
markets, the euro rebounded somewhat vis-à-vis the Swiss franc. Our currency nevertheless
remained strong against the euro. At the end of November, it was quoted at 3.5 % above its average
rate during the first eight months of the year. The euro-Swiss franc rate was somewhat more volatile
as well. Its volatility in additional currencies now stands at about the same level as previously against
the D-mark.
On the stock markets, a distinct corrective movement set in even before the end of September.
Meanwhile, most stock indices are above the level obtaining on 10 September. Bond yields have
increased a little in the last few weeks as well. Both effects can be interpreted as a sign of renewed
optimism concerning the economic development in the medium term.
In the days after the terror attacks, the resiliency of the financial system was put to a test never before
described or even considered in any emergency plan. Payment transactions in US dollars were
affected directly. Faced with the possible breakdown of individual banks and parts of the system which
are crucial for carrying out transactions, the Federal Reserve - by way of the discount window -
pumped massive amounts of liquidity into the system. On the basis of a swap agreement, the
European Central Bank supplied banks in the euro area directly with dollar liquidity. The National Bank
was in close touch with the Swiss banks and - should this have been necessary - we would have been
in a position to lend support as well. The demand for Swiss franc liquidity also rose sharply. Naturally,
we made the necessary amounts available to the full extent. As was to be expected, it became evident
that only a part of this liquidity was needed, and we were able to reabsorb it through repo transactions
as early as 12 September. On the two days following the attacks, repos totalling approximately
Sfr 40 billion were turned over.
The experiences gained in the aftermath of 11 September have shown three things. Firstly, that the
financial system - even in this unique and completely unexpected situation - still managed to function
relatively smoothly. Different players contributed to this, but it was mainly the banks themselves which
supported one another with creative flexibility in the interest of the situation as a whole. Secondly, our
repo system enabled us to take the necessary steps without problems. Had we still been dependent
on foreign exchange swaps with US dollars, conducting monetary policy under the given conditions
would have been eminently more difficult. Thirdly, these experiences prove how vulnerable the highly
integrated global financial system really is. They clearly underscore that securing the stability of the
financial system must constitute an important part of the role of central banks.
The Swiss franc on the foreign exchange and capital markets
We do not expect that the introduction of euro cash, which is upon us in a little less than a month, will
have any significant impact on the financial markets. However, it will be interesting to see if, to what
extent, and in what areas people in Switzerland will use the euro as a means of payment. Certain
structural effects of the euro have already become evident for quite a while, for example on the
primary bond market, where the Swiss franc is losing in weight while the euro capital market is
enjoying growing popularity due mainly to its excellent liquidity.
According to the survey conducted by the Bank for International Settlements (BIS) for the trading days
of the month of April, the trading volume in international foreign exchange transactions dropped by
nearly 20% within three years. Another contributing factor to this development was the advance of
electronic trading and the discontinuation of trading between the euro's predecessor currencies.
Roughly 6% of all global foreign exchange transactions include the Swiss franc. This share still
amounted to 7% three years ago and to just over 8% nine years back. The fact that the Swiss franc
has lost relative significance in foreign exchange trading is probably largely attributable to institutional
conditions for trading in additional currencies having improved. By far most of the Swiss franc
transactions were effected against the US dollar. This currency pair was traded approximately five
times as frequently as the Swiss franc-euro pair. This volume ratio, however, is likely to be subject to
strong fluctuations depending on specific exchange rate developments. At any rate, the National Bank
will be pleased to see the historic, special role played by the Swiss franc as a foreign exchange trading
currency continuing to diminish.
BIS Review 101/2001 3