Navigating the corona crisis with pragmatism
On 3 April 2020 this text was updated due to current events.
The figures on the epidemiological front are positive. The number of new confirmed corona cases is beginning to flatten out. On the economic front, however, we are only at the beginning of what will be difficult developments.
Bleak economic outlook
The economic damage caused by Covid-19 will run into the billions and drive Switzerland directly into a recession. SECO corrected its highly uncertain growth forecast for 2020 to -1.5 percent. In an initial phase, the main reason for the decline will be the sectors directly affected by the corona measures, especially SMEs.
However, no segment of the economy will ultimately remain unaffected by the consequences of the protective measures against the pandemic. This can be seen on the national and global financial markets. Company valuations have fallen sharply. The market volatility underscores the fact that it is difficult to assess the future course of the economy. It is therefore almost impossible to estimate what the second-round effects of the massive destruction of value will be.
Bracing against a crash
In the very short term, the aim is to prevent thousands of Swiss SMEs from becoming insolvent due to lost revenues. The Swiss authorities therefore introduced an arsenal of measures early on to contain the risks. To ensure these take effect quickly, they are oriented towards economic policy instruments that have proved effective in the past.
This pragmatic approach makes sense. The instruments can be implemented quickly without giving rise to excessive bureaucracy and their impact can be readily assessed as a result of the authorities’ long-standing experience. What is new, however, are the modalities of implementation and the scope of the overall package.
The Federal Council’s total package of measures amounts to CHF 60 billion. It includes liquidity support for companies, broadening and simplifying short-time work, compensation for loss of earnings for the self-employed and immediate aid for the culture, sport and tourism industries.
Banks part of the solution
It became clear very early on that the banks play a key role in the Federal Council’s plans. The CHF 20 billion in federal guarantees for liquidity support in the form of loans account for half of the total package. The guaranteed bridge loan programme for SMEs announced by the Federal Council on 20 March 2020 is therefore also at the core of these efforts to prevent widespread insolvency of the companies concerned. On 3 April 2020, the Federal Council decided to increase the guarantee volume for the SME loan programme to a total of CHF 40 billion.
The two credit facilities (COVID-19 Loans/Loans Plus) build on the existing structures of the guarantee organisations to provide rapid and straightforward loan support to SMEs facing a liquidity squeeze.
The banks stand by their responsibility to provide credit to the economy. The Swiss Bankers Association has called on all banks with a lending business to participate in the programme. They have solid capital buffers and sufficient liquidity. The financial system thus has the capacity to meet the needs of the economy and the inhabitants of Switzerland in this difficult situation.
This is also confirmed by FINMA and the SNB. The latter is supporting the banks in their role as providers of credit by increasing the exemption thresholds, thereby reducing the burden of negative interest rates. It is also giving them unlimited additional liquidity through the SNB COVID 19 refinancing facility (CRF). Also providing room for manoeuvre in terms of sufficient loans is FINMA’s temporary exemption of central bank reserves for the calculation of the leverage ratio and the Federal Council’s deactivation of the countercyclical buffer1.
Initial experiences positive
To date, 121 banks have put their loan processing platforms online and these were operational within a very short time. They have also seconded a large number of additional staff to process loan applications. Experience during the first few days shows that the system was able to cope well with the strong demand. In this crucial initial phase, the banks have made a significant contribution to averting countless cases of hardship and major economic damage and were able to meet the high requirements and expectations.
Major challenges remain
As with the SBB’s timetable, which has been cut back, it will become apparent that it is easier to reduce capacity than to return to full production. This is because on the one hand, the supply chains that have been interrupted must be started up again, and on the other hand, because demand must pick up again. The Federal Council has repeatedly emphasised that it wants to minimise the damage to the greatest extent possible.
In the best-case scenario, consumer or investment expenditures not made during the lockdown will be made afterwards. SECO is optimistic. Growth expectations for 2021 are above average at 3.3 percent. This presupposes, however, that both the sanitary and economic policy measures are effectively implemented both at home and abroad.
1The package of measures is explained in detail in the article Quick, straightforward, effective: corona support for SMEs in the current issue of insight.