"...Macht geht vor Recht"
Comment of the Day

November 06 2013

Commentary by Eoin Treacy

"...Macht geht vor Recht"

Thanks to Iain Little for this edition of his Fund Manager’s Diary which may be of interest to subscribers. Here is a section
Bank Frey, a small Swiss bank backed by a big local family, is closing its doors for business. Frey is the latest victim of the furore over banks that facilitated US tax evasion, a furore pursued with vengeful intensity by America and its servants. Fourteen banks ("round up the usual suspects: Julius Baer, Credit Suisse, Pictet") have been publicly named and, in some cases, shamed and now have fireside chats with Uncle Sam. Cue... ardent denials of wrongdoing from several, and rumours of Zurich law offices burning candles at both ends in their defence, and some say we are only in the first act of a five act play. Damage extends well beyond the fourteen banks, as every Swiss bank is now on the line to come clean over murky dealings with untaxed Americans. Various "Sin Bin" categories have even been devised so banks can 'fess up, depending on the degree and timing of their guilt. But what is noteworthy about Frey's demise is its declaration that it is not the American affair alone that has caused it to shut up shop. The bank also cites a series of business pressures -regulatory, competitive, financial- that have added to its distress and make its position untenable. Local firms familiar with Finanzplatz Schweiz will recognize these pressures (we know of at least one well-heeled foreign family seeking to buy a clean Swiss bank at a dirty price). Ideas on the back of a postcard, please.


...Macht geht vor Recht. Historians will marvel at the success of the Great Powers -and no Great Power is currently greater than America- to uproot the tenets and practice of what is misleadingly called "Swiss banking secrecy", and in such short order. And political philosophers will marvel at the way in which the smaller nation state in our interconnected, global village is subject to effective extra-territorial -and extra-judicial- control from larger brethren. Might turned out to be right. But whatever the rights and wrongs of banking secrecy -and its reality has always been less absolute than the image painted by the media- Switzerland's politicians have served the majority of its bankers poorly to defend the special interests of the minority, the larger, more "strategic" banks where business is at risk from American hegemony. The result has been a quiet, whimpering collapse similar to another quiet, whimpering collapse over two decades ago in eastern Europe, when American power also cast its long shadow over a distant land and the world awoke one morning, changed forever.

Eoin Treacy's view Switzerland is blessed with stunning geography which made it a difficult country to invade. As a crossroads between major powers such as Germany, France, Italy and the Austro-Hungarian Empire Switzerland positioned itself as a mountain fastness which could be relied upon for security. The internationalisation of banking has changed how business is conducted but there will always be a market for extraterritorial banking services sharing a land border with major economies. One of the primary issues for Swiss banking is how much damage public humiliation has done to their reputations.

The Swiss Banks Index ranged above the 2009 low in 2011 and 2012 and has held a progression of higher reaction lows over the last year. It pulled back sharply over the last month to retest the region of the 200-day MA and bounced today suggesting at least a near-term low. It will need to hold above 613 on the next pullback if the medium-term upward bias is to continue to be given the benefit of the doubt.

Half a world away Singapore is strategically placed in the straits of Malacca, one of the world’s busiest shipping lanes and in the backyard of emerging economic superpowers, China and India. It does not have the same issue with US accounts as Switzerland and has introduced its own version of banking secrecy over the last decade. Singapore has been referred to as the Switzerland of Asia and its assets under management remain on an upward trajectory.

The Singapore Financials Index continues to consolidate in the region of 800 which also marks the 2010 and 2011 highs. A sustained move above 850 would confirm support in this area and reaffirm medium-term demand dominance.

The Swiss Franc/Singapore Dollar cross rate is instructive. The Singapore Dollar halved against the Franc between 1985 and 1987. The Franc then trended lower for nearly 15 years, unwinding the majority of its advance. It rallied to break the progression of lower rally highs by 2002 and has been ranging mostly between S$1.20 and S$1.40 for much of the last decade. The spike higher in 2011 was associated with persistent strength in the Franc due to the Euro crisis and concurrent sharp weakness in many Asian currencies. This cross rate suggests that despite Singapore’s many attractive attributes, the Swiss Franc is still more favoured as a safe haven in times of stress.

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