bruno gehrig : review of the swiss economy introductory remarks by prof bruno gehrig, vice - chairman of the governing board of the swiss national bank, at the end - of - year media news conference, zurich, 13 december 2002. * * * the past year was an eventful one for the international financial markets. the global deterioration in economic prospects and eroded investor confidence deepened the stock market slump as from the middle of the year. parallel to this development, the interest rate level continued to fall. the central banks contributed to the interest rate reduction. however, with risk premiums increasing at the same time, financing conditions failed to improve for many companies but actually often deteriorated. foreign exchange following the steep slide of the us dollar, exchange rates stabilised again from mid - year onward once it had become clear that the growth slump was affecting all major economic regions equally. the swiss franc fluctuated within a relatively narrow margin to the euro this year. the geopolitical uncertainty premium applied to the swiss franc after the shock of 11 september 2001 is still being paid ( see graph ). in the current year, we again recorded phases of heightened upward pressure on the swiss currency. we tried to counteract the negative consequences of the strong swiss franc and the risk of further upward movements by lowering the interest rate several times. since the beginning of september 2001, the key interest rate differential between the euro and the swiss franc has widened from one to two percentage points. the yield on long - term bonds in swiss francs is also around two percentage points below that on corresponding euro paper. this has lowered the attractiveness of the swiss franc somewhat compared with the euro. the stabilisation of the euro / swiss franc relationship – albeit at a relatively high rate for the swiss franc – is a positive development. experience has shown that the exchange rate development has a significant influence on business activity in switzerland. we are still determined to counteract any additional upward trend of the swiss franc that might jeopardise the economic recovery. bonds in the capital markets around the world, nominal yields dropped considerably ( see graph ). however, borrowers with medium and low credit ratings did not benefit much from this development as credit risk premiums rose during the year. this also limits the macroeconomic stimulus effect of the yield decline. in addition, real interest rates did not decrease to the same extent because simultaneously inflation expectations again subsided markedly. particularly in the euro's core countries – first and

reliable conclusions to be drawn as to the risk distribution after the credit risk transfers. it can be concluded, though, that credit risks are borne by a larger number of market players than previously and that diversification possibilities are probably better utilised nowadays. in interbank business, too, more attention is being paid worldwide to default risks. a growing share of interbank business is hedged ; this is also the case in switzerland, where repo business has developed steadily. unhedged transactions still clearly account for the bulk of interbank business, but with an average volume of approximately sfr 20 billion, interbank repos, which were neglected for a long time, have grown to a respectable size. with respect to system stability, this development is favourable and should be further promoted. continuous linked settlement ( cls ) as regards credit risks in foreign exchange business, the launch of the cls system this autumn is a milestone achievement. cls bank, which has its headquarters in new york, serves as a platform to eliminate the so - called herstatt risk, i. e. the settlement risk inherent in foreign exchange deals. previously, the two legs of a foreign exchange transaction were settled at different times. if us dollars were bought against swiss francs, the franc amount was to be paid during european trading time. the corresponding amount in us dollars, however, was credited only a few hours later – during us trading time. in the few intervening hours, a credit risk existed. if a bank had been closed down during this time period, its counterparties might possibly have lost huge amounts of us dollar receivables. cls bank now makes it possible to settle foreign exchange transactions in the major currencies based on the « payment versus payment » principle, thereby eliminating the settlement risk for these transactions. currently, 42 financial institutions are directly linked to the system ( settlement members ) and settle their foreign exchange payments via cls in seven different currencies. one of these settlement currencies is the swiss franc. three swiss banks – ubs, cs and zurcher kantonalbank – participate in cls. apart from these three swiss banks, two other financial institutions – hsbc and bank of america – effect foreign exchange transactions in swiss francs via cls. every day, these five institutions together enter around 1, 400 payments in the amount of almost sfr 20 billion into cls. settlement takes place via a direct link between the swiss interbank clearing system ( sic )