Swiss malaise (Commentary: Why Europe is sick at its core)

CBS Marketwatch ^ | Aug. 22, 2002 | Paul Erdman

[Gritty]

SAN FRANCISCO (CBS.MW) -- Paul Krugman, the New York Times columnist and Princeton professor of economics, has been concerned lately that the post-bubble United States is about to enter an extended period of stagnation.

The U.S. situation in the first decade of this millennium, he fears, could be similar to that of Japan in the final decade of the previous millennium, following the bursting of its bubbles.

Krugman is right to worry. But he's worried about the wrong continent.

His concerns should be centered on Europe, not America. And the poster boy for the economic malaise that is increasingly enveloping Europe is its former star performer, Switzerland.

The pillars of that country's unique post-World War II prosperity are today crumbling, one after another. What that country may end up with is a socialist state devoid of entrepreneurship, behind the curve in technology, burdened with an aging population and declining educational standards. As if this were not bad enough, as a result of revelations of Swiss cooperation with the Nazis during World War II, and its continuing practice of using bank secrecy to attract dirty money from every crooked corner of the world, it is a nation that is also increasingly regarded as amoral, a pariah.

Taken together, all this represents a recipe for economic stagnation.

The oracle of the Alps

The most recent chapter in the decline and fall of Switzerland was the collapse of the financial empire of Martin Ebner, the Swiss equivalent of Warren Buffett. The vehicles they used were similar: closed-end investment companies, essentially investment trusts. In Buffett's case, it was Berkshire Hathaway. In Ebner's case, it was a series of investment trusts known as the BZ group and operated under such names as BK Vision, Pharmaceutical Vision and Specialty Vision.

Those who invested in Ebner's "Visions" did extremely well during the boom years on the Swiss stock exchanges. They outperformed the mutual funds run by the major Swiss banks, both public and private banks, by a wide margin. One reason for this was that Ebner did not shy away from using leverage, borrowing billions from a dozen of Europe's largest banks. At the peak of his power, he was by far the largest shareholder in Switzerland's blue-chip corporations, including the heavy electrical equipment giant Asea Brown Boveri; the chemical company Lonza; Baloise Insurance; Intershop; and even Switzerland's second largest bank, Credit Suisse. Parallel to this, using A&A Actienbank, a private bank located in Zurich that he controlled wholly, he speculated in high-tech startups.

Then came the slow-motion crash on the Swiss stock exchanges. The blue-chip index, the SMI, plunged from an all-time high of a shade under 8,500 at the beginning of 2000 to a low of under 4,400 late this spring. The value of Ebner's holdings dropped by half during the first six months of this year alone. The banks closed in on him. He was forced to relinquish control of an empire that now lay in ruins. The Swiss government closed down his bank. His investors got crushed.

So did the reputation of the Swiss -- the supposed masters of money management.

Safe haven no more

In the wake of this, investors are exiting Switzerland's banks in droves.

Two of Switzerland's most prestigious private banks, Lombard Odier and Darier Hentsch, were forced to merge in order to survive, and they are now in the process of laying off 300 of their top money managers in Geneva.

As a result of the huge losses in its own investment portfolio, Credit Suisse has seen its capital base shrink to a level that barely meets international standards. Talk about parallels with Japan!

In addition to the financial pall that hangs over the country, the Swiss economy itself is in deep trouble. Exports are falling as a result of the Swiss franc's being overvalued against both the dollar and the euro. Economic growth is expected to reach 0.5 percent, at best, this year.

The malaise in Switzerland is bound to deepen as prospects for economic growth in the country that provides its principal export market, Germany, have now fallen back to zero, and where the increased deficit spending now required to finance reconstruction in eastern Germany following the flood disaster there will push the budgetary deficit over 3 percent of GDP and endanger the entire fiscal-stability pact felt essential to keep Europe together and the euro intact.

Europe, then, is sick at its very core. It is there, not in the United States, that fears of a repeat of what has happened in Japan are fully justified.

As to hedging your bets by investing in European stocks: Forget it.

[Free Vulcan]

And these goons pound on the table and Demand! Demand! Demand! that we bow to their one world government visions.

Good article, this is the first I have seen about the economic problems of the Swiss. I follow this stuff closely and this sure hasn't been reported here.

[Russell Scott]

When your primary business is harboring laundered drug money, and ill-gotten gain of crooked politicians, what do expect. Its like putting strip clubs, crack houses, and bars in a nice neighborhood. Then watch as all the families move out, and the pimps, prostitutes, gang bangers, and drug addicts "redecorate" the area.

[Free Vulcan]

ping

[nothingnew]

Yet another great article posted today that I've read, and 5 replies in 2 hours.

What? Another post on breaking news about David Westerfield get posted?

Sheesh.

FMCDH

[Southack]

It's good to see these problems in print, but in contrast to the rest of Europe, Switzerland is ahead of the game still.

The Swiss have already acted to close down and/or merge their troubled banks. Try doing that in France or over in Asia with Japan.

Of course, even with German budget deficits of 3% of GDP, unemployment in France and Germany bumping up against 10%, overwhelming government corporate restrictions, and a host of other major problems with the core of their economy, you're still going to see bubble-heads tell you to "invest in Europe" to avoid whatever ills they think that they see over here in the U.S.

I even watched some idiot on Fox this morning tell people to invest in telecom stocks! I'm surprised that a few of them aren't still out hawking Pets.com (even after its bankruptcy and liquidation). Such idiots will preach the pros about any and every fad (e.g. tech stocks, gold, pharmaceuticals) with such reckless abandon that one wonders if they've ever actually been educated on "cause and effect".

[joonbug]

Wealth creation versus wealth redistribution. One leads to prosperity while the other leads to stagnation and malaise. Countries make their choice and live with the consequences.

[Leisler]

They dug a hole and figure if they redouble their efforts they'll come out into the sunshine somewhere.

[Billthedrill]

As to hedging your bets by investing in European stocks: Forget it.

According to recent reports a number of Saudis are attempting exactly that. They'll be back. Quietly or in loud denial, they'll be back.

[Gritty]

... the economic problems of the Swiss...

Stock markets all over the world are heading south. It's a world thingy.

[Consort]

Switzerland

Geneva

Zurich

[Bedford Forrest]

What impacts on UBS, pray tell?