Just When Swiss Say Chocolate Is Safe Cyprus Hits FrancPatrick Winters
Swiss companies from toilet manufacturer Geberit AG to chocolate maker Lindt & Spruengli AG are anticipating the franc will weaken and boost earnings this year. Europe’s latest debt crisis flare-up may spoil the bet.
While the Swiss currency reached a 20 month-low of 1.2569 per euro in January, it has since strengthened to 1.2151 as Cyprus sought a bailout and political deadlock in Italy prevented a government from being formed. Options indicate the franc will trade closer to the central bank-imposed 1.20 per euro cap by year-end than 1.25.
A weaker franc would help Swiss companies sell more products abroad and compete with cheaper offerings from neighboring countries such as Germany. Geberit, Bucher Industries AG, Belimo Holding AG and Daetwyler Holding AG are budgeting for 2013 exchange rates in a range of 1.20 to 1.25 francs per euro. Recent economic and geopolitical events are a threat to those assumptions, according to Credit Suisse AG.
“It’s definitely a risk if we have significant contagion spreading due to the Cyprus crisis,” said Bernd Berg, a currency strategist at Switzerland’s second-biggest bank.
Economic crises increase short-term demand for currencies seen as a refuge, pushing up the value of the franc, Berg said. He added that there is a concern savers in Italy and Spain may withdraw money from local lenders, leading to a “bank run in the euro zone” after capital controls were instituted limiting depositors’ access to their funds in Cyprus.
It’s critical for Switzerland to keep the franc from rising and damaging the economy. The Swiss National Bank said last month that growth is expected to be 1 percent to 1.5 percent this year. That compares with 2.35 percent for the global economy, according to surveys of economist by Bloomberg.
The franc rose to as high as 1.008 per euro in August 2011, from as low as 1.6828 in 2007, before the SNB imposed the 1.20 per euro ceiling in September 2011 to help exporters and fend off deflation.
Today marks the one-year anniversary of the franc’s sole breach of the cap. The Swiss currency briefly stood at 1.19995 per euro on April 5 last year. The exchange rates below 1.20 francs per euro were set by banks which don’t have counterparty agreements with the SNB, leading to a market where trades “below the best price were concluded,” according to Switzerland’s national bank.
The central bank’s campaign to defend the cap has led to foreign currency holdings ballooning to more than 400 billion francs ($425 billion), or almost three-quarters of annual output. It spent 188 billion francs intervening last year, 10 times the 2011 amount.
Options contracts betting the franc will weaken are about to the cheapest since January. There is also a greater chance of the franc appreciating to 1.20 per euro than weakening to 1.25 by year-end, data compiled by Bloomberg shows.
At the same time, the current median estimate by strategists and economists surveyed by Bloomberg is for franc to trade at 1.25 to the euro by year-end and 1.30 in 2014. Credit Suisse’s Berg predicts the franc will depreciate once the euro-zone economy recovers.
The assumptions of Swiss companies and economists for a weakening franc also stem from successful efforts by the SNB to discourage speculators by defending the cap. The central bank reiterated March 14 its willingness to spend unlimited amounts to keep the ceiling from being breached.
The central bank did a “great job” defending the franc cap and there is “no reason to believe” it will change policy, Thomas Aebischer, the chief financial officer of Jona, Switzerland-based Holcim Ltd., the world’s largest cement maker, said in an interview in February.
Lindt, the world’s largest maker of premium chocolate, said March 15 there are signs of a weaker Swiss currency, which may boost exports. Syngenta, the world’s biggest producer of crop chemicals, isn’t expecting losses from the franc this year after losing about $220 million in operating profit in 2012, mostly because of Swiss currency movements, CFO John Ramsay said Feb 6.
The 1.20 per euro level is “a clear line which should not be crossed, and gives us security that things stay as they are,” said Roland Iff, the CFO of Geberit, which gets more than 90 percent of its sales from Europe. “If nothing happens we could see levels at 1.25 again,” Iff said in an interview on March 12, adding that the company benefited from the strengthening euro in the first quarter.
Cash Machine Queues
Iff’s comments show why predictions for the franc may prove difficult. Within a week of his comments, euro-area leaders agreed on a plan to impose losses on deposits in Cypriot banks. The franc since has strengthened 1 percent against the euro.
Scenes of Cypriots lining up at cash machines raised the specter of capital flight elsewhere and threatened to disrupt a market calm that settled over the currency bloc since the European Central Bank’s pledge in September to backstop troubled nations’ debt. The euro-zone economy has contracted for five straight quarters and the ECB predicts gross domestic product will shrink 0.5 percent in 2013.
Most Swiss companies, which employ Europe’s highest-paid workforce, are able to operate under the ceiling as currency losses in recent years prompted them to cut costs, said Martin Lehmann, a money manager at 3v Asset Management in Zurich.
“Most of the companies did their homework and adapted their cost base well to the new level,” he said.
Bucher Chief Executive Officer Philip Mosimann said in a March 14 interview that, while many bigger Swiss companies such as his maker of agricultural machinery and street sweepers with annual sales of 2.6 billion francs are able to live with the current exchange rate, smaller companies are desperate for the currency to weaken as they can’t move production abroad and depend on sales to Europe.
Since 2008, Bucher probably lost at least 400 million francs in sales because of the currency’s gain versus the euro, a figure that would be difficult to stomach for other companies, according to Mosimann.
“If you ask the CEO of a small or medium-sized company, he’ll tell you, ‘I just can’t live with 1.20,’” he said.