Bubbles, bazookas & the Bundesrat
The Swiss Insider 22.03.2020 #insidersdoitsmarter
Dear Insider,
It was the best of times…and now…it is the worst of times.
Markets have tanked, workers are being laid off (or nearly so) and the future remains as murky as it was seven days ago.
In the midst of the swirling uncertainty in the world, there is Switzerland, suffering (almost) as much as any other country. Recession is a foregone conclusion at this point and many small businesses are caving under the requirements that force them to close their doors for an unknown amount of time.
Just over a month ago, the Swiss Market Index had reached a record high, well over 11 000 points. Now it sits at just over 8 000.
Was it all a terrible bubble? Possibly…
But no one can rightfully say that the current crisis is rooted in any great misstep on the part of banks or businesses. Corporate debt, fueled by record low interest rates, certainly ballooned over the last few years. Can you really blame companies for reaching for the stars when money is so cheap?
Now the need for cash to at least maintain operations is forcing companies - in Switzerland and around the world to take drastic steps.
In the United States, the country’s central bank has embarked on a program of bond buying along with other measures to shore up the credit markets which are clearly becoming the most worrisome part of a toxic equation.
In Switzerland, there (so far) no bond buyouts. But there is a surprisingly bold support package coming out of Bern.
Often maligned for being backward and dithering in style and substance, the Swiss Federal Council (Bundesrat) has stepped up its game…as it must.
Like others in power around the globe, they are pulling out their bazookas…
The Bundesrat’s Bazooka
Switzerland’s Federal Council has been doing a lot of sitting lately.
From “sitzung” to “sitzung” the group of seven have had their hands full, keeping abreast of the rapidly worsening corona situation, both on a health level and an economic level.
In the course of the last week+, the Council held several press conferences, each to announce both new measures to implement social distancing and provide federal funds to prop up businesses (See “The Numbers Game” below) and give tax and regulatory relief.
For some, it was too little, too late.
Compared to dramatic actions announced by the US Federal Reserve (proposals currently reach 1 trillion USD), the money promised and the steps taken may not seem like much.
And yet, for a federally-distrubuted government which normally relies on cantonal governments for local action (a method which generally failed in the current crisis…), these nation-wide orders and the money behind them is truly a monumental step.
Swiss businesses are not used to seeing quite such decisive action from a governing body that usually takes its sweet time reach a consensus decision. The forthright manner in which Simonetta Sommaruga and her compatriots have waded into the growing mess proves that there is just enough power behind the council to maybe make a difference - and Swiss bazookas are potent enough when they have to be.
💡What It Means
A closer look - with perspective…
💰 Small and smaller
Over 90% of Swiss business is done by small and medium-sized businesses, providing 66% of employment in the country. The coronavirus situation is hitting them especially hard since a vast majority of them are financed exclusively through their cash flow, without access to bond or stock issuance options available to blue chips.
The Federal Council has promised help - and together with major Swiss banks and the Swiss Banking Association has started a 20 million CHF guarantor program to offer bridge financing to SMEs.
On Friday afternoon, Swiss Finance Minister Ueli Maurer announced plans to make it possible for SMEs to get the money they need “within 30 minute.” The plan involves leveraging the workforce of Swiss banks to make the process go smoothly. He counts on at least 10 000 applications rolling in very soon. Up to 500 000 CHF will be paid out immediately. This includes a promise to make available up to 10% of a company’s yearly revenue, or up to 20 million CHF.
💡What It Means
Like most other governments in the Western world, the Swiss Federal Council has stepped in with a mind to protect workers and small businesses. What they cannot control is markets in the wider world. This is nothing new. In the short term, such measures will help stave off panic. In the long term, there is not so much Switzerland can do if export markets fall to pieces because of a worldwide downturn. Nevertheless, supporting a strong home market will be key.
🏛 Banks Be Better
Everyone hates a banker - until they need him/her. The current situation has underscored this point as a close cooperation between Swiss banks and the Swiss governement turns out to be a good thing - especially for SMEs.
The Swiss National Bank is playing its part to support the big boys on Paradeplatz - and ostensibly help them help others. Reducing the penalty of negative interest rates by cutting the capital threshhold factor from 30 to 25, a move that banks had called for in the last week.
The actions taken by the SNB extend not only to local banks, as Thomas Jordan and company joined in action with the Federal Reserve, the Bank of England and others to prop up dollar swap credit lines in order to keep the US currency in good supply to local businesses with dollar-denominated debt.
Despite being designated by the government as essential businesses which are allowed to remain open during the nation-wide shutdown, some banks have gone ahead and closed a portion of their branches - and rightfully so. The upside? The whole experience will help them go digital…even faster.
Unlike the crisis of 2008, the liquidity crunch which fueled the recent market drop was not caused by complex mortgage bond structures leading to a mass of hidden balance-sheet exposure. Bank liquidity (at this point) remains strong. Individuals and small businesses, on the other hand, have bigger issues. The rich and famous also find themselves under the gun with margin calls for private banking loans causing sleepless nights for both clients and their RMs.
💡What It Means
For the time being, banks are the people’s best friend. (And small secret - no one wants the people to turn against them…bank runs are the last thing society need in these times!)
The opportunity to serve a scared economy and come out on the other side with the respect and even affection of the population is too good a PR opportunity to miss for banks.
Given that citizens who are locked at home, glued to their smartphones and computers may be tempted to turn to digital fintechs and neo-banks, it’s also a matter of survival.
🛩 Running Aground
The drama continues for airlines around the world. Travel bans and fears of foreigners are wrecking havoc on one of the main engines of global business.
SWISS Airlines is no exception and the stark reality was presented publicly by SWISS CEO Thomas Klühr. A partial or even complete grounding is not out of the question, with revenue practically non-existent at the moment.
Both the airline and Zürich Airport have placed a majority of their employees on temporary unemployment benefits. In the case of SWISS, the number is over 7500 employees. At the time of writing, SWISS was operating only 6 aircraft.
💡What It Means
The pain felt by airlines is acute. It will likely require a massive amount of state support to get back to anything near its condition before the virus outbreak. With summer months likely to remain under the shadow of the pandemic, a vast majority of 2020 revenue is down the drain.
The bigger question is how business will re-adjust to flying and business travel in general. Distance work is now a lot easier to imagine - and thanks to forced adoption of technology, easier to implement.
💊 The Pharma People
The coronavirus crisis has put an extra spotlight on one of Switzerland’s largest and most profitable industrial sectors - pharmaceuticals. The two names that every household knows - Roche and Novartis - find themselves at the center of discussion from every side.
Roche CEO Roche Severin Schwan recently revealed that his company is talking to regulators about making Actemra, a Roche-produced drug, available to help mitigate the side effects of coronavirus
Roche is also engaged to send the first round of COVID-19 tests to the USA. The number seems big (400 000) but with exponental growth kicking in, it may not be enough.
Novartis CEO Vas Narasimhan was generally pesimistic about the amount of time it will take to come up with a vaccine for COVID-19, telling CNBC it could take up to a year.
💡What It Means
All eyes are on the medical and healthcare professionals these days. Crowds of isolated citizens applaud them from their balconies. Less applause is reserved for the scientists that could potentially turn the tide in the current crisis. A greater amount of government pressure on pharma companies would be welcome, and closer cooperation in the future may help prevent such terrible situations. Expect regulations to be relaxed at least somewhat and public-private sector communication to grow in the wake of corona.
⚰️ Looking Ahead - the Insurance Roulette
Disasters on a global scale usually hit insurance companies hard.
In the case of Swiss Re, that (supposedly) isn’t the case.
Speaking to Bloomberg, the largest Swiss insurer’s CFO John Dacey declared that coronavirus would not have a material impact on the company’s business. After a record market drop last week (in which Swiss Re stock lost over 15%) he may regret those comments, although he indicated that the company had greatly reduced its exposure to disease-related events after the 2003 SARS outbreak.
❗️Some reports, however, point to the fact that should the 2020 Summer Olympics in Tokyo be cancelled, Swiss Re would be on the hook for 1,5 billion CHF.
Meanwhile, reports are circulating that Swiss regulator FINMA is staying in close contact with not only Swiss Re, but also its peers Swiss Life, Zurich and others, to make sure that no gaps in capital buffers appear.
**What It Means**
So far Swiss insurers are covering their backs. With insurers also making up a large part of the financial service industry through pension funds, real estate investment and other areas, exposure to drastic market movements may be their biggest risk. The harder-hit health insurance companies may not be so lucky…
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The Numbers Game
All the numbers that matter in these troubled times…
This week’s numbers are all about money - how much will be doled out to help Swiss business…or at least how much has been promised.
💸 6 billion CHF
Economy minister Guy Parmelin has set aside 6 billion Swiss Francs to support the needs of the temporary unemployment system, which is set to be overloaded in the next phase of the crisis. (See “Running Aground” above)
💸 4 billion CHF
Self-employed persons and owners of micro-businesses such as hairdressers and gastronomic establishments can count on 4 billion Francs in support from the Bundesrat.
💸 1,5 billion CHF
Just over 1,5 billion CHF is earmarked for those who work in culture-related businesses and sport.