Wednesday, April 08, 2009

Switzerland threatened with bankruptcy

The rapid growth in many countries of Eastern Europe was stimulated through loans in Swiss francs. Swiss banks and offshore institutions loaned the local banks francs, which passed the francs onto their customers. The loans were attractive because borrowers pay interest rates much lower than required for loans in local currency.

Now, this system has been shaken?

Yes, the system has only worked as long as the exchange rate between the franc and the currencies were reasonably stable. But that is not currently the case. For example, the Hungarian forint and Polish zloty have lost over a third of their value against the Swiss franc in recent weeks. Because of the devaluations of the national currencies, the debt to Switzerland has increased by more than one-third. Many of the Eastern European countries have serious payment difficulties, and are virtually bankrupt.

What does this mean for Switzerland?

It is likely that a significant proportion of the total 200 billion U.S. dollars of Eastern European loans were issued in Swiss francs. According to a report by the Bank for International Settlements worldwide franc loans equivalent to around 675 billion U.S. dollars are in circulation - which was about 150 billion directly from Switzerland, 80 billion of Great Britain and about 430 billion U.S. dollars through offshore financial centres. How many of these loans have gone bad is not known. But even if the failure rate is 20 percent, the banks would lose a lot of money.