July 30, 2010  Print Email | UBS deal makes Swiss franc less attractive
UBS slips below 10 francs
Posted by Agencies at 01:51 PM GMT on Feb 24, 2009 | NEW YORK (Reuters): Switzerland's landmark decision to allow UBS to pass client data to Washington will tarnish the Swiss franc's safe-haven allure as the country's prized bank secrecy laws come under assault.
 For decades, the Swiss franc has been viewed as the world's safest currency in times of uncertainty, thanks to the Alpine country's once vast gold reserves, low inflation, political neutrality and laws protecting banking confidentiality.
But UBS AG's agreement last week to disclose about 250 names of US clients to tax investigators raised doubts over the future of Switzerland's secretive banking industry, fueling fears of capital flight which have weighed heavily on the franc.
"The Swiss will now have to become much more compliant with global banking laws," said Boris Schlossberg, director of currency research at GFT Forex in New York.
"That will make Swiss banks much less desirable as a safe haven for people who want privacy and there could be potentially a huge capital outflow from the Swiss banking system," he said.
The Swiss franc hit a more than two-month low of 1.1884 against the dollar Friday. The dollar last traded 1.4 per cent higher at 1.1691 francs, while the euro rose 0.3 per cent to 1.4847 Monday.
The global financial crisis has seen the Swiss franc gain sharply on the back of safe-haven buying and a rapid unwinding of trades funded by the cheaply borrowed franc.
In 2008, the euro declined about 10 per cent against the franc, while the dollar dropped roughly 6 per cent.
Despite a pledge from Swiss Finance Minister Hans-Rudolf Merz that "bank secrecy will stay," the UBS deal raised the chances that Switzerland will have to cooperate increasingly with foreign tax authorities in the future, analysts said.
German Finance Minister Peer Steinbrueck has taken aim at Switzerland, repeatedly accusing the country of hiding untaxed money.
The US government widened its legal probe Thursday, seeking to access the details of 52,000 UBS clients.
Thousands of wealthy businessmen avoid taxes by placing assets in Switzerland, which manages about a third of the world's undeclared wealth.
Switzerland does not consider tax evasion a crime and Swiss law prohibits disclosure of client data or names unless the country's authorities believe the customer has committed a serious crime.
"The co-operation by the Swiss government over the US government suing UBS calls into question whether or not Switzerland will be able to maintain its ability to shield the identity of those that have investment funds in that country," said Andrew Busch, global FX strategist at BMO Capital Markets in Chicago. "That's not good for the Swiss franc obviously."
SAFE HAVEN ISN'T SAFE
Efforts to dismantle bank secrecy could add to pressure on Swiss banks and the overall economy, which have been hit hard by the widening global economic crisis.
Moody's Investors Service warned of a deepening recession in emerging Europe last week, fueling fears about the knock-on effect on Western European banks. A significant proportion of Eastern European loans were issued in Swiss francs.
"Switzerland has seen an explosion in its exposure to emerging markets, including those in Europe, in recent years," said Adam Cole, global head of FX strategy at RBC Capital Markets in London.
As long as the risk of negative news from emerging Europe remains high, "this has implications for the Swiss franc's status as a safe-haven currency," he added.
Switzerland's lending to emerging markets in Europe amounts to $64.1 billion, Cole said. He expects the dollar to hit 1.27 francs within three months, or about 9 per cent above its current level.
A weaker currency would be welcomed by the Swiss National Bank, which has made it clear in recent weeks that it may sell francs if necessary to halt the currency's rise.
Some analysts said the franc's safe-haven allure has begun to wane in recent years due to factors such as the launch of the euro, the gradual opening up of the Swiss financial sector and the sales of gold that once backed its currency.
Chuck Butler, president at Everbank World Markets in St Louis, said while the franc is still seen as a safe haven, it really is no safer than other major currencies.
The Swiss franc is "a fiat currency just like all the other ones. It did always have those secret bank accounts, but now they are not secret anymore so there is no reason for a lot of investors to hold Swiss francs," he said. "To me right now, a lot of people are just moving past all the fiat currencies and moving into hard assets like gold."
Spot gold traded at $994.75 an ounce on Monday, down from $1,005.40 an ounce on Friday.
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