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For Strong and Weak, Debt Pressures Rattle Europe

GENEVA — The almighty dollar used to be the world’s safest refuge in times of trouble. But what do you do when you are worried about the dollar, as many people are now?

Come to Switzerland.

An avalanche of dollars and euros has been tumbling into this Alpine outpost at record rates, as investors see the franc as a haven from the twin debt crises in the United States and Europe. And the Swiss are not happy about it.

On Wednesday, the typically silent Swiss central bank declared the currency “massively overvalued” against the dollar and euro, and unexpectedly cut interest rates in an attempt to weaken the franc. The franc retreated slightly but is still too strong, as far as the Swiss are concerned.

“The franc is like the new gold,” said a Geneva banker who would give only his first name, Dmitri, insisting on the discretion that is the hallmark of this reserved nation. “It’s crazy and it’s all anyone is talking about, in the morning, at lunch, at dinner parties.”

It was certainly Topic A at the noon lunch hour recently in Geneva, where Dmitri and other dark-suited bankers had emerged from the doors of Credit Suisse, UBS, Goldman Sachs and many other wealthy banks to perch near the broad expanse of Lake Geneva to chew on grilled fish and the issues of the day.

Switzerland is vaunted as a country that attracts money for its secretive bank accounts and the less savory business of tax evasion. But it is also the home of “le franc fort,” a muscular currency long seen as second perhaps only to the dollar because this nation — unlike some others — tends to have its finances in order.

Now the Swiss franc is second no more.

Despite the passage at long last of a Washington deal to lift America’s debt ceiling, the dollar recently plunged to record lows against the Swiss franc on fears the American economy will slow further.

Even after the Swiss central bank’s announcement, the dollar was trading at 77 Swiss centimes, down about a third from the level of a year ago.

The euro has fared little better. As Europe succumbed to its own debt troubles last year, the franc took off against the euro. Now, as the latest European bailout for Greece fails to shield big countries like Italy and Spain from the credit contagion, the franc remains strong against the euro.

Despite the Swiss central bank’s Wednesday move, a euro will buy 1.10 Swiss francs — far less than the 1.38 francs that a euro was worth a year ago.

With the rest of the world so untidy, Switzerland looks pristine. Despite a generous safety net, this tiny nation does not have other onerous expenses, like a big military. Its current account surplus is an enviable 15 percent of gross domestic product, and it has low debt. The economy grew 2.6 percent last year; unemployment is around 3 percent.

Still, while it is easy for Switzerland to lure other people’s money, there may be such a thing as too much of it. Even for the Swiss.

The Swiss central bank sought to tamp down demand on Wednesday by narrowing its target band for a key rate, the 3-month Libor, to 0.00-0.25 percent from 0.00-0.75 percent to fight the franc’s appreciation.

Authorities declared they “won’t tolerate” a “tightening of monetary conditions,” and would take further steps as necessary to curb the franc’s rise.

The cost of fine Swiss-made goods, from watches to precision machinery, has gone from eye-popping to eye-watering, and Swiss companies are warning of peril.

“This is bad for the Swiss economy,” said Thomas Christen, the chief executive of Lucerne-based Reed Electronics, who has started buying cheaper materials to offset his costs.

Everything from a cup of coffee to a Swiss Alpine ski vacation has been priced to the stretching point or beyond reach for many tourists.

Mark Tompkins and Serena Koenig of Boston were stunned during a recent visit. “A mixed drink at an average bar,” Mr. Tompkins said, “was 18 to 20 Swiss francs” — $23 to $25 — “so two rounds of drinks for four people was crazy expensive.”

In downtown Geneva, where a phalanx of regal storefronts glitter with diamonds and gold, Jean Loichot said his business from Americans and Europeans had slowed to a trickle.

“In 32 years, I never saw it like this,” said Mr. Loichot, whose boutique, Jean Loichot & Cie, specializes in TAG Heuer watches. “And in a few months, it’s going to be worse.”

Even one of his longtime European clients, a millionaire with a private jet, recently said he would hold off buying a costly watch until the franc’s value becomes more reasonable.

“People have money,” Mr. Loichot said as a metallic silver Ferrari and a black Bentley purred past. “They’re just not buying.”

Swiss people, on the other hand, are snapping up lots of things — though not necessarily to the benefit of their nation’s economy. On the weekends, Swiss families drive into France to load up on wine, food and other goods at hypermarkets where they can buy with the strong franc.

“The parking lots are filled with Swiss license plates,” said Keith Rockwell, a spokesman for the World Trade Organization who has witnessed Switzerland’s ebbs and flows for more than a decade.

Meanwhile local supermarkets like Coop, whose shelves are stuffed with products made outside Switzerland, are practically empty because shopping is cheaper elsewhere. Worried, the store recently asked the government to investigate why importers were not passing on the savings they were making from buying euro-priced goods.

Newspapers regularly lament “le franc fort,” and warn that worse is on the way. Last month, when the Tribune de Genève asked readers in an online poll whether the situation had become “alarming,” a majority clicked yes.

“We are in the stratosphere at this point,” Yves Bonzon, the chief investment officer of Pictet & Cie, a private Geneva-based wealth management bank, said of the currency. He estimates the hit to the economy is the same as if the Swiss central bank had jacked up interest rates to 7 percent from 1 percent.

When the franc first started to surge during the global financial crisis, the Swiss central bank, which manages the currency, fell into a mild panic. It blew 19 billion francs between 2009 and last year in a failed strategy to keep the currency in line. (The bank lost an additional 10.8 billion francs on foreign exchange holdings in the first six months of this year.)

On Wednesday, the bank steered clear of intervention but indicated it was ready to do more.

“There seems to be a consensus that probably the Swiss franc should be more like 1.30 or 1.40 toward the euro,” rather than near parity, Walter Meier, the spokesman for the central bank said last week. “But history has shown that these periods of valuation can remain for quite a long time.”

While there has always been a silent Swiss schadenfreude about not joining the European Union, some politicians here have even called lately for pegging the franc to the euro. Still, no one really seems to have ideas for action, aside from hoping that Europe and the United States get their houses in order.

“That would be the most desirable scenario, but we don’t build hope on that,” Mr. Meier said. “You just have to be prepared for the worst, and if it gets better, you’ll take it.”

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This document was last modified by Mick Carty on 2011-08-09 10:44:21.
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