Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for the Swiss Confederation (long-term local- and foreign-currency issuer and senior unsecured debt ratings: AAA/Stable; short-term local- and foreign-currency issuer ratings: S-1+/Stable) on 4 July 2023.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Key rating factors

Switzerland’s AAA ratings are underpinned by: i) its wealthy and well-diversified economy, highly skilled labour force and institutional strengths, including a stable, consensus-oriented and effective policy framework, which, in aggregate, underpin a high degree of economic resilience; ii) prudent fiscal management and authorities’ strong commitments to longer-term debt sustainability, underpinned by stringent and constitutionally-anchored budgetary rules as well as favourable financing conditions; and iii) a significant net external asset position, highly competitive exporting industries and the safe haven status of the Swiss franc. Challenges include: i) a highly concentrated and very large banking sector in relation to GDP, posing potential contingent liability risks to public finances, as highlighted by the Credit Suisse crisis in March 2023; and ii) imbalances in the real estate market with high levels of residential overvaluation, after the continued increase in residential property prices since 2020, increasing vulnerability to market corrections. These risks are mitigated by the significant wealth of Swiss households, as well as by the effective financial policy making and the Swiss Financial Market Supervisory Authority’s prudent supervisory framework.

In March 2023, following a confidence crisis and substantial deposit outflows at Credit Suisse, Swiss authorities brokered the takeover of Credit Suisse by UBS, which was completed by the delisting of Credit Suisse stocks on 12 June 2023. The merger was supported by a significant liquidity provision to Credit Suisse by the Swiss National Bank (SNB), including via two novel emergency instruments, namely emergency liquidity assistance + (ELA+), benefitting from preferred creditor treatment, and the Public Liquidity Backstop (PLB), benefitting from a federal guarantee as well as preferred creditor treatment. Finally, the Federal Department of Finance provided a guarantee of up to CHF 9bn for losses incurred on a specific Credit Suisse portfolio, which would only become effective if losses exceed CHF 5bn. Losses up to CHF 5bn will be borne by UBS.

Outstanding net borrowings of Credit Suisse via SNB facilities amounted to CHF 88bn at the end of May 2023, consisting of CHF 38bn under ELA and CHF 50bn under ELA+. The PLB has been repaid in full.

The prompt intervention of regulators, the strength of UBS’ business model and balance sheet and the forceful liquidity provision by the SNB helped stabilise market confidence and financial stability. Still, the takeover will likely adversely impact the Swiss banking industry, its contribution to GDP and domestic employment (Credit Suisse had around 17,000 employees in Switzerland before the merger).

Moreover, the merger results in greater concentration of financial system contingency risks. According to the unaudited, pro-forma condensed balance sheet, total assets of the combined entity were around USD 1.73trn as of December 2022 (CHF 1.6trn, or around 208% of 2022 Swiss GDP).

Finally, Switzerland’s formal withdrawal from negotiations over the institutional framework agreement with the EU in May 2021 prolonged uncertainty about Switzerland’s near-to-medium-term financial and trade relations with the EU. This could hold potential negative effects on the Swiss economic outlook over the long term, complicating the process for establishing future trade agreements with its major trading partner. However, the two parties have held exploratory talks since March 2022, and the Federal Council approved on 21 June 2023 parameters for a negotiation mandate, with a formal decision on its adoption by the Federal Council later this year.

The Stable Outlook reflects Scope’s assessment that the challenges Switzerland faces remain manageable in view of the country’s outstanding credit strengths. The ratings/Outlooks could be downgraded if, individually or collectively: i) financial stability risks materialised with significant negative implications for the economic growth and public finance outlook; and/or, ii) the economic outlook worsened materially, for example, due to a significant deterioration in relations with the EU and trade disruptions.

For the updated rating report accompanying this review, click here.

The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Rating Methodology, 27 September 2022) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Lead analyst: Julian Zimmermann, Associate Director

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