Will Switzerland Fall Prey to the Troubles of the Eurozone?

Zurich is clean. I mean, really clean. It took three days before I accidentally saw a drug deal, and even that was down an alley after I got lost, and so politely done, as I imagine back-alley drug deals go, that it took me a moment to realize what was happening.

It's this sort of delayed disbelief, this sort of miscomprehension of events, that seems to have swept Switzerland, and namely, Swiss banks, into the wake of an economic climate it has largely avoided. But the troubles of the eurozone, neighboring Switzerland on all sides, have made themselves known in the small alpine country.

Neutrality put to the test
The country's decision in 2001 not to join the eurozone, when its neighboring countries to all sides were leaping on board, was clearly a good one for the neutral country. Granted, the cost of living is high, a Starbucks latte and muffin that in the States would have cost me $6 cost me nearly 10 francs in Bern. The unemployment rate is low; while other countries were watching the ranks of their unemployed rise in number, Switzerland's declined steadily from above 4% in January 2011 to 2.8% in July 2011. It's since risen to 3.4%, only to drop back down to 3%.

The country is not without its dark side: Swiss-manufactured hand grenades recently were used in the Syrian conflict, prompting the Swiss government to suspend all arms deals to the United Arab Emirates. Its CPI dropped 0.03% in June, which wasn't unexpected.

Shelter from the storm
Long the haven of international customers looking for tax shelters, the Swiss banking system has come under attack from a myriad of sources, not the least of which is Germany. German tax officials recently raided the homes of 5,000 clients of Credit Suisse (NYSE: CS  ) who purchased insurance policies granting them tax-free interest on savings. Swiss-based UBS (NYSE: UBS  ) has been raided in Bordeaux, Strasbourg, and Lyon, France, by French agents searching for evidence of tax evasion. A senior UBS executive with ties to the Obama administration has been reined in following what UBS officials have deemed an especially cozy relationship with the president.

It's another blow for a banking system that has faced growing scrutiny of its deposits from overseas. Overall, the total amount of foreign assets managed by banks in Switzerland has dropped nearly 300 billion francs (about $305 billion) since 2008. Overall, the amount of foreign assets under management dipped to 51% of total AUM at the end of 2011, the lowest it has been in the past four years.

A bank scandal? You don't say
It's not surprising that the Swiss banking system should come under fire; few banks in fewer countries have escaped scrutiny following the global economic collapse. The investigations aren't idle ones; officials from HSBC (NYSE: HBC  ) will appear on Capitol Hill next week to face accusations that the global banking behemoth allowed criminal organizations and terrorist groups to launder money. The bank is also being investigated for the alleged interference in LIBOR, a scandal which prompted the chief of Barclays (NYSE: BCS  ) to resign earlier this month and Deutsche Bank (NYSE: DB  ) to suspend two employees following an external audit. More than 16 banks are facing inquiries over their involvement in the LIBOR interbank rate manipulation scheme.

In the global environment of bank disasters, from the MF Global collapse to the LIBOR rate manipulation, from the fallout from subprime mortgages to laundering for terrorist groups, Switzerland's safe haven for tax evaders seems almost charming.

But consider Switzerland's neighbors: Italy, with an economy that's shrunk 2.4% this year; France, with an economy that its president called "flatlined"; and of course, Germany. Switzerland is the sole holdout from the eurozone in Western Europe, surrounded as far as the eye can see. In this case, a sort of reverse of the old adage is true: If they don't join you, beat 'em.  

But another adage remains true: Buy low, sell high. Not all banks are a bad investment right now; in fact, some are ideal investments right now, including one of the banks I mentioned. To find out which banks Fools are buying, check out our special free report: "The Stocks Only the Smartest Investors Are Buying." Download a copy today; it's free for Fools.

Molly McCluskey does not own shares of any of the countries mention. Follow her travel and finance posts on Twitter @MollyEMcCluskey.

The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1945303, ~/Articles/ArticleHandler.aspx, 11/28/2014 7:30:06 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement