Swiss markets drop as franc rises

Swiss equities sank further on stock markets Friday, with the Swiss Market Index (SMI) of blue-chip Swiss corporates down 6 percent in a second day of retreat. The SMI had already fallen 8.7 percent on Thursday.

The drop was generated by Thursday's surprise decision by the Swiss National Bank, the country's central bank, to stop trying to cap the value of the franc at 1.20 francs to the euro.

The cap had been adopted by the SNB three years ago in order to stop a wild rise in the franc that had resulted when nervous currency traders abandoned the euro, in the midst of the euro crisis when there appeared to be a risk that a Greek default might cause the euro currency area to break up. Traders sold euros and bought francs - which have traditionally been seen as a safe haven - and drove it to levels that threatened to make exports of goods and services from Switzerland uncompetitive.

A wave of profit warnings and dividend payout adjustments is likely for Swiss firms in coming weeks and months as a consequence of Thursday's decision. Most blue-chip Swiss corporations - for example, watchmakers like Swatch and Richemont, or pharmaceutical firms like Novartis and Roche - sell the great majority of those goods primarily outside the country.

Shares in Swatch and Richemont were down 6.2 and 6.6 percent respectively as of Friday afternoon, adding to Thursday's substantial declines.

Morgan Stanley analysts wrote: "We estimate that 85 percent of Swiss company sales come from overseas, and many of the large-cap names generate 90-95 percent of their revenues" from sales outside Switzerland.

With the franc worth around 17 percent more than it was a day and a half ago - the franc is now nearly at parity with the euro - Swiss companies must face the challenge of absorbing what amounts to a 17 percent revenue cut on every item sold.

"The stronger franc will be a drag on earnings for Swiss multinationals," said Martin Moeller, head of equities at Geneva-based Union Bancaire Privee.

World-wide market repercussions

While Swiss firms face the biggest long-term challenge from SNB's decision to stop trying to cap the franc, in the short term, market participants around the world faced turbulence as markets reacted to the unexpected move.

Asian and European stock markets reacted moderately, with losses or gains of around one percent. Tokyo's Nikkei index lost 1.43 percent, reflecting the fact that the yen became more expensive, which won't be helpful for Japanese exporters.

More significant consequences were in play for hundreds of thousands of families in eastern Europe, who have mortgage debts denominated in Swiss francs. Around 550,000 Poles, 150,000 Romanians, and a substantial number of Croatians now face increases in their monthly mortgage payments.

Croatia's debtor organization Franak held an emergency meeting with the country's finance minister, Boris Lalovac, who promised assistance, possibly in the form of a conversion of franc loans to euro loans. Romania's union of banking clients applealed to the government to pass a law to protect people with franc-denominated debts, proposing a limit on the growth of debt repayment installments to 20 percent.

The SNB's surprise decision also caught a number of currency brokers with their metaphorical pants down. At least two firms went bankrupt. The small New Zealand trader Global Brokers closed down shortly after the SNB's announcement on Thursday, and British currency trader Alpari followed suit on Friday.

At the end of the day, it will be the Swiss who will be most affected. UBS, a major Swiss bank, cut its GDP growth forecast for Switzerland to 0.5 percent for 2015, down from its previous estimate of 1.8 percent.

nz/hg (dpa, Reuters)