Swiss Businesses Fear Impact of Central Bank's Franc Move

ZURICH--Swiss businesses are bracing themselves for negative effects from the scrapping of the Swiss central bank's cap for the franc-euro, a move that could sharply reduce the value of sales to their key European markets.

The blue chip Swiss Market Index plunged 9.6% in lunchtime trading, and billions of Swiss francs were wiped from the value of companies such as cement maker Holcim AG and pharma giant Novartis AG, after the Swiss National Bank said it would eliminate a long-observed cap of 1.20 francs per euro.

Representatives from Novartis declined to comment, while Holcim said the drop reflected the general development of the Swiss market.

The SNB's decision, which caused the franc to surge in value to about 1.03 per euro from around 1.20, was particularly critical for companies which rely on sales to the 19 countries in the eurozone--Switzerland's biggest export market and buyer of more than half of the Alpine country's products.

A rise in the value of the Swiss franc reduces the value of sales made in euros, and pressures profitability. It also makes Swiss products less attractive if Swiss companies raise their euro-denominated prices to compensate.

Swiss watchmakers are vulnerable as they have to produce most of their products within Switzerland, to qualify for a so-called Swiss-made label. Jean-Daniel Pasche, president of the Swiss watchmakers' federation said he was "anxious" about the decision, and feared a negative impact on exports.

Among the companies worst affected in Thursday's selloff were the watchmakers Swatch Group AG and Cie. Financière Richemont SA, both of which saw their stock plunge 15%.

Swatch Chief Executive Officer Nick Hayek has previously been among the strongest supporters of the 1.20 Swiss franc per euro minimum exchange rate, which was introduced by the SNB in September 2011 to prevent deflation and help Swiss companies remain competitive.

Mr. Hayek said Thursday's decision by SNB President Thomas Jordan to scrap the minimum exchange rate will have disastrous consequences for Switzerland.

"Words fail me," Mr. Hayek said in a prepared statement. "Jordan isn't only the name of the SNB president, but also of a river and today's SNB action is a tsunami; for the export industry and for tourism, and finally for the entire country."

Also likely to be badly hit by the SNB's decision are machine tool makers, one of Switzerland's largest export sectors. The rise of the franc made Swiss companies less competitive and "profit margins will melt," said Ivo Zimmermann, spokesman for their association Swissmem.

"Companies are thinking about what to do next," Mr. Zimmermann said. "They are very worried."

Plumbing and building supplies company Geberit AG said Thursday that for every 10% rise in the value of the franc, the value of the company's sales would fall by 7% to 9%, while its profit margin would be reduced by 0.5%.

Industry associations said exporters wouldn't be the only part of the Swiss economy to be hit.

"Suppliers to the exporters in Switzerland will come under pressure to reduce prices again," said Rudolf Minsch, chief economist at Economiesuisse, the country's main business association which represents around 100,000 companies.

There was also likely to be a surge in consumers shopping outside Switzerland, crossing over the borders into neighboring France, Italy and Germany, depressing consumer spending within Switzerland.

Another worry was the lack of certainty which the minimum exchange rate gave and many companies based their decision making around, Mr. Minsch said.

Many now expect the Swiss economy, which has consistently outperformed its neighbors in recent years, to slow. Switzerland's annualized growth hit 1.9% in the third quarter, compared with just 0.6% in the eurozone.

Investment was likely to be reduced as a result of the uncertainty, while jobs and wages could also come under pressure.

The Swiss Federation of Trade Unions estimates around 80,000 jobs could be lost if the Swiss franc settles in the long term around parity with the euro.

The resulting rise in the value of the Swiss franc would put pressure on wage levels and employment, while it could also lead to more outsourcing, its chief economist Daniel Lampart said.

Write to John Revill at [e-mail]

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