By Johanna Treeck

WASHINGTON (MNI) – The strong Swiss franc is a concern for
Switzerland, but fresh foreign exchange market intervention is not the
most realistic scenario in the near term, Swiss Finance Minister
Hans-Rudolf Merz told Market News International.

In an interview during the International Monetary Fund and World
Bank meetings over the weekend, Merz also said he expected Switzerland’s
parliament to largely take on board the recently published proposal of
an expert commission recommending tougher rules for banking giants
Credit Suisse and UBS.

“The currency is a cause of concern for Switzerland. We are an
export-oriented economy and we do suffer under the strong franc,” Merz
said.

He added that he does not rule out a return to forex intervention
but that does it not seem to be the most realistic scenario in the near
term.

“The Swiss National Bank (SNB) did what it had to do to soften the
blow, and rightly engaged in euro transactions,” Merz said. “It is a
fact that in Switzerland the state only intervenes if the economy is not
able to overcome problems independently. We are not in that situation
yet.”

However, “the government is monitoring the situation on a daily
basis,” he added. “Such measures have to be considered carefully.”

The Swiss National Bank intervened earlier this year when the Swiss
franc was rising sharply against the euro, in order to prevent
deflationary risks from materializing. In June, however, the SNB stopped
intervening, saying that the deflationary risk in Switzerland had
“largely disappeared.”

Merz said that the SNB’s latest cut to its inflation forecasts does
not equate with a return of deflationary dangers.

“Low inflation must be seen in conjunction with growth figures.
Growth forecasts have been revised upwards at least for the coming
months. I don’t believe that we are facing real deflation dangers,” Merz
said.

In September, the SNB slashed its inflation forecast for 2010 to
0.7% from 0.9% and for 2011 to 0.3% from 1.0%, while raising the 2010
GDP forecast to approximately 2.5% from a previous forecast of 2.0%.

Merz warned against talk of a “currency war” as tensions in foreign
exchange markets topped the unofficial agenda at the annual meetings of
the IMF and World Bank.

“Speaking of a currency war is exaggerated,” Merz said, adding that
policymakers have been urged to tone down the debate.

“During a lengthy debates here it was said repeatedly: Please avoid
using this term. You are creating an atmosphere that conjures up a new
catastrophe. You are destroying confidence that is slowly returning
after the financial crisis,” Merz noted.

Merz also said Swiss lawmakers are likely to embrace tougher rules
suggested by a government-appointed commission for its two banking
giants Credit Suisse and UBS, which are considered too big to fail.

The commission said the two banks should boost total capital to 19%
of their risk-weighted assets by 2018. This compares with 10.5% required
under Basel III. Capital in common equity should rise to 10% compared to
the new global standard of 7% stipulated in Basel III.

“Over the coming days, the Swiss government will look at the
proposals of the expert commission and then enact parts of it into law.
Of course I cannot predict whether parliament will fully subscribe to
the proposal,” he said. But “the parliament will not dare to deviate
much; they do have to take the responsibility,” he said.

Merz dismissed concerns that tougher rules could hamper credit flow
to the real economy or put Swiss banks at a competitive disadvantage
compared to other global banks.

“Of course we have discussed [the new rules] with the big banks and
of course the new rules squeeze their margins and of course it is
tedious to build up extra capital in these times,” he said. However,
assurances from Credit Suisse and UBS that they will be able to meet
requirements mainly using their operating profit over the phase-in
period dispelled concerns, Merz said.

“In fact, I would turn the argument on is head. If the Swiss
banking giants are so robust and can lead by example in adjusting to new
requirements, then of course this can be a [model] and can have a very
positive effect for international clients and Switzerland as a financial
center,” Merz said.

He said he would also welcome other countries following the Swiss
example by finding solutions for systemically relevant banks. “We would
again have a level playing field,” Merz said. This may yet take some
time, however, as many large banks outside of Switzerland remain in a
weaker position than their Swiss counterparts.

Merz sees no quick return to calmer financial markets, warning that
the Eurozone’s sovereign debt crisis will stay with us for some time.

“This problem has not been solved and had probably been
underestimated,” he said. “There are [always] new surprises. The latest
surprise was that now China is ready to buy debt and get involved in the
business,” he added. “Now Eurozone countries must find solutions.”

— Frankfurt bureau: +49-69-720 142. Email: jtreeck@marketnews.com —

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