CAPITAL MARKET DEVELOPMENTS ABROAD. Switzerland Nine Charts on Financial Markets Abroad

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1 DIVISION OF INTERNATIONAL FINANCE BOARD OF GOVERNOR* H. 13 No. 133 CAPITAL MARKET DEVELOPMENTS ABROAD FEDERAL RESERVE SYSTEM January 15, 1964 I I. I. Switzerland Nine Charts on Financial Markets Abroad I. Switzerland: Money and Capital Markets, October-December, 1963 Interest rates in Swiss money and capital markets advanced further between October and December. (See Table 1.) In the money market the Zurich 3-month deposit rate, which was at 2.88 per cent on September 20, fluctuated between 3.12 per cent and 3.25 per cent but touched 3.36 per.cent at the end of December. (See Table 5, page 6.) In the long-term government bond market the yield rose from 3.26 per cent at the end of September to 3.41 per cent on December 20. (See Table 6, page 6.) Table 1. Switzerland; Selected Financial Indicators for Selected Dates, 1963 (in per cent per annum or index) Interest rates 3-month yields: January April July 26 September December Zurich banks a/ Euro-dollars b/ U.S. Treasury bills b/ Deposit certificates (3 to 8 years): 12 cantonal banks 5 large banks Long-term government bonds Stock prices (1958 = 100) Exchange rates Spot francs (U. S. cents) Forward premium on franc cj a/ Most frequently quoted rates of the five large Swiss banks in Zurich, b/ Return in Swiss francs after cost of exchange cover. c/ Per cent per annum. OFFICIAL USE ONLY (Decontrolled after six months)

2 OFFICIAL USE ONLY The Swiss authorities took additional restrictive measures during the period under review. In early December the Swiss Bankers' Association extended a previous agreement to neutralize foreign funds coming into Switzerland; they also adopted a complete ban on lending for luxury building and land speculation and accepted strict limitations on lending for construction purposes. In addition, the authorities decided to seek new legislation to strengthen the powers of the Banque Nationals Suisse (BNS). On the external side, largely because of inflows from Italy, the Swiss franc was in strong demand throughout October, and official reserves rose by $59 million as the BNS intervened to keep the franc at its announced ceiling against the dollar. The capital inflow slackened off during November (when reserves declined by $9 million) and early December; but by mid-month the usual year-end repatriations of funds from abroad by Swiss banks pushed the franc back to the BNS ceiling. In consequence, official reserves increased by $317 million in December,^acquired mostly through direct dollar swaps between the ENS and commercial banks rather than through the market. Restricted domestic money market and credit conditions. Internal demands on the Swiss money market continued strong during the October to December quarter, and money rates did not.recede from the level to which they had been pushed by market stringencies in early October. Even though the central bank purchased spot dollars in the exchange market in October, the Zurich 3-month deposit rate rose to 3.25 per cent, and it held around that level from late October to the year-end. (See Table 5, page 6.) But the year-end needs of the commercial banks helped to push the 3-month deposit rate up to per cent by December 27. The stability of the rate throughout December no doubt reflected the franc-dollar swaps conducted by the BNS with the commercial banks; during the final three weeks of the year--the Bank furnished $207 million of Swiss francs directly to the banks for dollars. As a step toward a more restrictive credit policy, the Swiss Bankers 1.Association in early December adopted a new set of voluntary controls which represented a renewal and strengthening of the,two earlier "gentlemen's agreements" on credit policy. New rules to control the use of foreign funds provide that new funds coming into Switzerland (which are not invested in foreign shares) will be withheld from domestic money and capital markets and maintained in cash or in deposits with the BNS. In the field of construction, the banks have also agreed to curtail direct and indirect lending on luxury construction, to eliminate lending connected with land speculation to local authorities, and to limit lending for residential, commercial and industrial construction by reducing the proportions of total property values eligible for bank financing. - In early December the Federal Cabinet announced a three-point emergency anti-inflationary program concentrating on (1) a tighter credit policy, (2) building restrictions,and (3) limitations on the numbers of foreign workers permitted in Switzerland. In the credit field, the Cabinet intends to request legislation to increase the monetary powers of the Banque Nationale Suisse by OFFICIAL USE ONLY

3 OFFICIAL USE ONLY providing a wider scope for open market operations, the right to impose differential minimum commercial bank reserve requirements, and powers to establish commercial bank credit ceilings. In order to restrict building activity, the authorities will take executive action to establish building coordination boards with legal powers to limit construction and to determine building priorities. Action to limit the influx of foreign workers does not require new legislation and is a continuation of existing policy in this field. * Capital markets; yields hold, new issues heavy. Yields on Federal Government long-term bonds fluctuated narrowly between 3.26 and 3.37 per cent through mid-december, reflecting the varied factors affecting medium and longterm credit markets. In the expectation that market conditions would ease, the BNS in early November refused to permit the commercial banks to increase the rate they pay on medium-term bank bonds (Kassenobligationen) During October the market absorbed abnormally,large amounts of domestic new bond issues with little impact on long-term market rates (see Table 6, page.6) ; even though the. new issue coupon rate was predominantly 4 per cent, some issues were offered below par, and older bonds weakened during the intense activity of October as market yields began to edge higher. New issue activity slowed down to a more normal volume during November and December. With supply and demand more evenly balanced, yields on long-term bonds remained steady through the year-end. But a few of the major banks began in the New Year an increase to 4 per cent in the rate they pay on medium-term bonds (Kassenobligationen). The $14 million issue of the Compagnie Francaise des Petroles (Paris)-- marketed in October was the first foreign issue allowed on the Swiss market by the authorities since July. (See Table 6, page 6.) Because no foreign issues were permitted and a heavy backlog of foreign issues waiting permission of the Swiss authorities had been built up, a very successful "Copenhagen Loan" in Swiss francs was offered outside the country in late October. An international syndicate of bankers headed by Morgan Grenfell in London offered a $14 million loan denominated in Swiss francs for the City of Copenhagen simultaneously in London, Paris, Brussels, and Amsterdam without Swiss participation. The loan) which carried a coupon of 5 per cent and was subscribed three times over/ created considerable stir in official Swiss banking circles. The authorities. were concerned that the Copenhagen issue involved a dilution of monetary control by frustrating the regulation of foreign issues to absorb just the liquidity in the domestic market; they were also disturbed at the loss of commissions and at the effects a higher return on Swiss franc securities floated outside the country would have on domestic market rates. However, the episode has led the authorities to relax somewhat the ground rules on which foreign loans may be floated in Switzerland.. Stock market prices-ended the year strongly influenced by the current discussions on anti-inflationary policy. Prices rose a bit in mid-november after falling from September to mid-november, but then fell to a nine-month low in mid-december, presumably in reaction to uncertainties about the government's OFFICIAL USE ONLY

4 OFFICIAL USE ONLY anti-inflationary program. >.Since the new year, the market has reacted favorably to the government's recent anti-inflationary measures. (See Table 2 and Chart 1.) Table 2. Switzerland: Industrial Share Index* (1958 = 100) May November 1~ July August December September October January *Swiss Bank Corporation Industrial Share Index. Heavy domestic demand for francs increases official reserves. The quarter opened with heavy demands for the Swiss franc as a substantial flow of funds from Italy built up using the dollar as a vehicle currency. The franc remained at its upper limit against the dollar throughout October and the BNS bought large sums of dollars in the Zurich spot market to hold the rate. (See Table 5, page6.) Thereafter, conditions eased, and the franc fluctuated narrowly against the dollar at rates between cents per franc to cents until mid-december when it again reached its upper limit ( cents). In mid-december, following President Kennedy-'s death, the Federal Reserve System increased the currency swap arrangements for Swiss francs with both the BNS and^the Bank for International Settlements from $100 million to $150 million each. Swiss official gold and foreign exchange reserves increased by $59 million in October, reflecting the inflow of funds from Italy. (See Table 3 ) They dropped $9 million in November, since the proceeds of the Copenhagen loan were not to be spent in Switzerland and the National Bank of Denmark swapped $14 million in Swiss francs directly with the BNS for foreign exchange. This alleviated Swiss fears that the proceeds would either be spent in the country, abetting domestic inflation, or be converted through the foreign exchange market, having disrupting effects on it. December's increase of $317 million in reserves reflects the BNS 1 massive dollar buying to assist the banks in their year-end liquidity needs. Most of these funds were acquired in dollar-franc swaps directly with the commercial banks themselves and will be reversed in early In turn, the Swiss central bank swapped the dollars for gold with the B.I.S. and this, too, will be reversed during the New Year. Digitized for FRASER OFFICIAL USE ONLY

5 OFFICIAL USE ONLY Table 3. Switzerland; Official Gold and.foreign Exchange Reserves, (end of period figures, in millions of U.S. dollars) Gold Foreign Exchange Total Change 1963 January , February , March , April ,632 ' - 6 May ,630-2 June , July August , September , October , November ,757-9 December , The price of the Vreneli gold coin dropped 50 centimes in early November as exchange market conditions eased and the demand from Italy subsided. It has remained steady at SF40.00 since. (See Table 5, page 6.) An approximately equal increase in imports arid decrease in exports during the third quarter caused the seasonally-adjusted Swiss foreign trade deficit to increase by an average of $9 million (or 13 per cent) per month over the second quarter of the year and by an average of $11 million (or 16 per cent) over the.same quarter of The third quarter deficit was $78 million. (See Table 4.) October's deficit was down slightly from the third quarter monthly average, but an $11 million increase in exports in November (preliminary data) combined with a $12 million decrease in imports, acted to reduce the monthly deficit to $54 million, its lowest since February ' Table 4. Switzerland: Seasonally-Adjusted Foreign Trade (in millions of U.S. dollars, month or monthly average) I II III IV I II III July Aug. Sept. Oct. Nov. Imports c. i. f /274 Exports f.o.b /220 Balance / Preliminary figures subject to adjustment. Source: OECD. Europe and British Commonwealth Section. OFFICIAL USE ONLY

6 Table 5, Switzerlandz Money Rates s Exchange Rates g and Gold Prices Buro-dollar Forward US Tr. bill deposit Swiss Swiss Net Net bank Spot Spot Gold. franc Bill return London return deposit SF in in coiniy (3-moo) yield in SF rate in SF (3-mo.)? * SF in SF 1963 Aug Sept , Oct ,071 40, , , , b/ b/ , Jan a/ "Vreneli" 20-franc piece (O 0l867 troy ounces^ at $35\per ounce)<» b/ Prelitninary figures. *Recent upper limit of imposed by BNS in the Swiss market; however, the Swiss authorities are not committed to hold the rate below Table 6 Switzerlandg Selected Capital Market Statistics 1963 Capital market yields. New issues Deposit cert's ( millions; monthly ave<, or month) Long-term 12 can- > (New money raised) govt. tonal large Swiss Swiss Fgn Total, bonds banks banks bonds stocks bonds Gross Net ±' High ToTT Apr, May Qtr. I June II July III Aug IV Sept, Oct ,64 Qtr, I Nov II , :n ' ^ July Aug , Dec Sept Oct Nov "a/ Net of reimbursements. Amounts by type are gross 0

7 Cha.t J INTERNATIONAL MONEY MARKET YIELDS FOR U.S. DOLLAR INVESTORS 3-MONTH EURO DOLLAR DEPOSIT VS. U.S. CERTIFICATE OF DEPOSIT.Wediteidoy figures p,f 1 YIELDS EUtO-DOUAt DEPOSIT u.s. CERTIFICATE or DEPOSIT - DIFFERENTIAL: EURO-DOLLA R OVER U.S. CERTIFICATE OF DEP OSIT i " NEW YORK OFFER RATES ON SELECTED 3-MONTH INVESTMENTS TREASURY BILLS -Fully Hedged - - i U.S. -favvv; - * U.K. 1 COMMERCIAL PAPER - Fully Hedged CANADIAN HNANCE COMPANY U.I. HIKE PURCHASE DEPOSIT L //v - U.S.IINAHC (^COMPANY

8 INTEREST ARBITRAGE, UNITED STATES / CANADA ~Th~77s d a y >1 g u rlt Per cent per 3-MONTH TREASURY BILL RATES UNITED STATES RATE DIFFERENTIAL AND FORWARD CANADIAN DOLLAR SPREAD IN FAVOR OF CANADA + i 1 1 i 1 i 1 t 1 r i RATE DIFFERENTIAL WITH FORWARD EXCHANGE COVER, I I I j j :. NET INCENTIVE :ANADA + i I j I_L i 1 i i.. 1 j i i. I J S D M

9 INTEREST ARBITRAGE, NEW YORK/LONDON Friday figures Per cent per annum^ 3-MONTH TREASURY BILL RATES i EURO DOLLAR RATE-LONDON RATE DIFFERENTIAL AND 3-MONTH FORWARD STERLING RATE DIFFERENTIAL WITH FORWARD EXCHANGE CO V E R IN FAVOR Of LONDON j I i A. i, i M J

10 LOAN BATE 1 EURO-DOUAB LONDON / INTEREST ARBITRAGE FOR GERMAN COMMERCIAL BANKS Friday figures Percent per annu 3-MONTH TREASURY BILLS, INTERBANK LENDING RATE AND " EURO DOLLAR DEPOSIT RATES n - i. r i - * i RATE DIFFERENTIAL AND FORWARD DEUTSCHE MARK TiJ I TREASURY'BILLS T RATE DIFFERENTIAL WITH FORWARD EXCHANGE COVER NET INCENTIVE: I IN FAVOR OF FRANKFURT (+) INTERBANK 10AN RATE/ \ ^ J M T J v i

11 SHORT-TERM INTEREST RATES * KlA>a_Li i I! I 1 I.

12 LONG-TERM BOND YIELDS Digitized for FRASER

13 INDUSTRIAL STOCK INDICES 1958=100 Jopon indea of 225 n

14 SPOT EXCHANGE RATES - MAJOR CURRENCIES AGAINST U.S. DOLLAR Per cent * Above por W - french FRANC

15 3-MONTH FORWARD EXCHANGE RATE Friday >igur>» AGAINST U.S. DOLLARS PREMIUM + AGAINST POUND STERLING - LONDON -! PRE MIUM +, - - RANC - A J2 1 - U.S. DOLLAI )'\ -! DISCO IUHT III I 1 1 AGAINST POUND STERLING - LONDON PREMIUM + franc