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The Muscle Bound Franc Is Mauling Swiss Business (Int'l Edition)

International -- Finance: CURRENCY


Through 180 years and two world wars, the Swiss have benefited from their prized neutrality: no European Union for them. Yet now that the stakes are monetary, not military, the Swiss are paying a price for their independence.

The irony is dangerous to Switzerland's economic health. As the 1999 deadline for a single European currency approaches, jittery traders hang on every word about the criteria and timetable for monetary union. Terrified that the rock-solid German mark could suffer from being melded into the currencies of less stable countries, investors are pouring into Swiss francs. That's a new twist: Although dumping French francs or lira for Swiss francs is a time-honored practice, dumping marks just isn't done.

BULGING SUITCASES. The Swiss dearly wish this foreign money would go back home. Already up 12% this year against the currencies of Switzerland's main trading partners, the strong franc is pinching exporters and slamming tourism. Economic growth for 1995 is expected to be only 1.3%, down from the 2.4% originally forecast.

Bankers say that international money managers and corporate treasurers are shunning German bonds for Swiss ones to hedge their portfolios, and private savers are driving across the border with their savings packed into suitcases. "The Swiss market is just too small to take it all," says Peter Buomberger, chief economist at UBS in Zurich.

The currency pressure is speeding up the restructuring that Swiss companies began in the early 1990s when they were gripped in recession along with the rest of Europe. Now, even more companies are likely to begin outsourcing supplies and moving production abroad. Elevator maker Schindler, for example, plans to close a component plant in Switzerland and one in Germany, shifting production to Spain. The company is under so much pressure that Credit Suisse forecasts profits may be slashed in half. Coupled with cheaper Asian and Central European competition, the currency squeeze leaves little room for profits. "We have a choice: Either we give up our margins or we lose our business," says Bruno Allmendinger, treasurer of Sulzer Ltd., a machine-tool maker whose profits slipped 29% in the first half. Watchmaker Swatch won't raise prices--but expects flat profits as a result.

Currency translation is crimping results even at Switzerland's blue-chip multinationals. Drugmaker Ciba-Geigy gets 93% of its sales outside Switzerland. So while net profit in the first half soared 37% when measured in local currencies, it posted a mere 5.9% gain in Swiss francs. Consumers are also balking at higher prices from Nestle--even though, on top of the currency effect, it's suffering from rising costs for raw materials. In foreign-currency terms, Nestle's sales climbed 10% in the first half. In Swiss francs, they slumped 1.5%.

"SCARY." To dampen the exchange-rate losses, more companies are trying to avoid paying in francs for supplies. Swissair buys fuel and handles aircraft leasing in dollars: It handles reservations from operators in Bombay and plans to do more aircraft repair in Ireland and Belgium. But the real pain comes from high-volume ticket sales in Italy and France, where softer currencies hurt Swissair's margins.

At home, families in Geneva drive to France to do their grocery shopping. Border towns such as Lugano are deserted as vacationers skip to Italy. Tourism, which accounts for 6% of Switzerland's gross national product, suffered its worst August in 43 years. And the strong franc's effect on the economy comes on top of anemic consumer spending. "It's getting to be a scary situation," warns Hans Kaufmann, chief economist at Bank Julius Baer & Co.

Swiss authorities have few options. A half-point cut in the discount rate on Sept. 21, to 2%, had little effect--Swiss rates were already the lowest in Europe. Perhaps in 12 to 18 months, low rates will put the economy back on track with higher domestic investment and consumption. But until the prickly matter of European monetary union is settled--which could take at least five years--the Swiss franc will remain volatile. Says Markus Rusgen, European strategist for Morgan Stanley & Co. in London: "That's ample time for pleasant and unpleasant surprises."

While the debate over monetary union grinds on, notes Kaufmann of Julius Baer, Switzerland could try to confuse the market by reconsidering membership in the EU. This time, a little threat to neutrality may be worth it.By Karen Lowry Miller in Bonn, with John Parry in Geneva

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