The threat of a collapse in the price of assets, such as government bonds, cannot be ruled out, star economist Nouriel Roubini tells swissinfo.ch. If that happens, the Swiss National Bank (SNB) could be faced with a multi-billion franc bill.
Since introducing a CHF1.20 exchange rate with the euro in 2011, the central bank has rapidly built up a huge stockpile of foreign exchange reserves that have nearly doubled in the past two years to CHF434 billion ($465 billion) in April 2013.
A large portion of these reserves has been pumped into eurozone government bonds as the SNB successfully held down the value of the franc. So far, the policy has paid off with interest payments on bonds helping to wipe out direct foreign exchange losses last year, leaving the central bank with a CHF6.9 billion profit in 2012.
But a sudden rise in the currently rock bottom interest rates could lead to a sharp reduction in the value of bonds, leaving Switzerland’s central bank with massive losses if it cannot divest its investments fast enough.
Asset prices have been rising at an unsustainably faster rate than real global economic growth in recent months, United States economist Roubini told the Swiss Economic Forum in Interlaken on Thursday.
Unless general economic conditions improve, global markets could start to experience a bubble as soon as next year, he warned. Such a bubble could then burst, leading to further global economic shocks.
«I worry more about asset bubble risks than the traditional risk of goods inflation,» Roubini told swissinfo.ch. «At the moment, we are witnessing a frothiness in asset prices that could lead to a bubble – not this year, but possibly next – and eventually end up in a crash.»
Structural weaknesses
Roubini, who was one of the few economists to accurately predict the 2008 financial crash, told forum delegates that the global economy was currently faring better than a year ago but was still dogged by underlying structural weaknesses that could flare up at any moment.
These included a possible break-up of the eurozone, collapse in the US economic recovery, a sharp fall in Asian economies and the threat of military conflict in Asia and the Middle East.
Roubini forecast the eurozone to «at best» experience a continuing recession for a decade to come, a situation that would harm Swiss exporters and pile more pressure on the SNB to continue its euro spending spree.
«The eurozone is no longer in the emergency room, but it is still in a chronically critical condition,» Roubini said.
«Sound institutions»
But he tipped Switzerland to survive even a worst-case scenario thanks to its traditionally solid economic and financial decision making.
«Switzerland is linked to the eurozone; no country is an island. But any country with such sound institutions and economic framework will be able to withstand shocks,» he said.
Roubini also believes Switzerland’s beleaguered financial system – under sustained global attack to give up its role as a secretive haven for international assets – can prosper even if the country caves into demands for reform.
«The Swiss financial system will continue to flourish because it provides a far more diverse range of financial and asset management services than other jurisdictions,» he said. «There are some jurisdictions that rely purely on tax evasion to survive.»