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Switzerland's shock rate cut unnerves markets

Section: Daily Dispatches

By Ambrose Evans-Pritchard
The Telegraph, London
Thursday, November 20, 2008

Switzerland has slashed interest rates a full percentage point to 1 percent in an emergency move, underlining the gravity of the credit crunch now spreading across Europe.

The Swiss National Bank, viewed as a bastion of hard-money rigour, said inflation risks had subsided with the sharp fall in oil and raw material prices since the early summer. "The international economic conditions have worsened appreciably, bringing a higher risk of a marked slowdown in economic activity in Switzerland next year," it said.

The surge in the Swiss franc in recent months has plagued industrial companies. Exports fell 2.8 percent in October compared to a year earlier. The country's KOF institute forecasts outright recession over the winter.

The SNB may also be worried about Hungary, Latvia, Poland, and the Balkan countries, where large numbers of people have taken out mortgages, car loans, and credit card debt in Swiss francs, disregarding the exchange rate risk.

The surge in the franc over recent months against currencies across Eastern Europe has compounded the pain for a region already facing extreme pressure. Hungary has already secured an IMF loan, and Latvia requested a rescue package yesterday. The Bank for International Settlements says foreign loans in Swiss francs now exceed $630 billion.

Traders in the City said the shock move raised concerns that the Swiss banking system may be in more serious trouble than generally understood. The Swiss banks have lent the equivalent of 50 percent of the country's GDP to emerging markets, according to the BIS.

Given that total liabilities of UBS and Credit Suisse are equal to eight times GDP, the central bank must have become deeply alarmed by the plunge in the share price of the two lenders this week. UBS has shed 61pc of its value in six months.

Michael Klawitter, an economist at Dresdner Kleinwort, said the SNB's move is another step towards zero interest rates across the G10 bloc of developed countries for the first time in history. The United States has already cut rates to 1pc, with further moves expected early next year to prevent the credit crisis spiralling out of control. Japan has cut to 0.25 percent.

Julian Callow, Europe economist at Barclays Capital, said it was highly unusual for the SNB to cut rates in an unscheduled meeting. "A hundred basis points is a big move and it shows how much damage there has been to the financial markets since US changed its rescue plans under the TARP," he said.

The SNB's president, Jean-Pierre Roth, said Switzerland had not run out of ammunition. "We're at 1 percent, so still have some margin for action," he said.

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