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 December 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 underpin a high degree of economic resilience; ii) strong fiscal fundamentals, driven by a strong commitment to longer-term debt sustainability and stringent and constitutionally-anchored budgetary rules, and 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, albeit declining, 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.

The merger of UBS and Credit Suisse was supported by a significant liquidity provision 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. 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.

During the second half of 2023, the Swiss Confederation’s direct risks related to the Credit Suisse take-over by UBS have been eliminated. UBS has exited the CHF 9bn Loss Protection Agreement without calling on any guarantees and Credit Suisse has repaid all loans provided under the PLB and ELA+ facilities. The bank paid a commitment fee and risk premium of CHF 214m – including CHF 61m to the SNB and CHF 153m to the Confederation – related to loans under PLB, together with a risk premium of CHF 476m to the SNB related to the ELA+ loan.

Despite the potential negative implications the takeover could have on the contribution of the banking industry to Swiss economic output and employment (Credit Suisse had around 17,000 employees in Switzerland before the merger), the prompt intervention of regulators, the strength of UBS’s business model and balance sheet and the forceful liquidity provision by the SNB helped stabilise market confidence and financial stability. The Swiss Federal Council will also make the PLB a permanent feature under ordinary law for systematically important banks. Finally, the Federal Department of Finance is expected to complete a comprehensive revision of the ‘too-big-to-fail’ regulation by the spring of 2024. At the same time, the solution found entails greater concentration of financial system contingency risks. After the merger, UBS’s total assets stood at USD 1.64trn as of Q3 2023, or CHF 1.5trn (around 193% 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 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 continued constructive dialogue between the two counterparties shows mutual recognition of the importance of stable relations going forward. Following initial exploratory talks, The Federal Council has prepared a negotiating mandate, with a final decision on whether to adopt it by end-2023. The main themes of the talks are centred on Switzerland’s participation in EU programmes; financial regulation; single market participation and free movement of people; state aid rules on air, land transport and electricity; and Switzerland’s cohesion contributions to the EU.

The Stable Outlook reflects Scope’s assessment that risks to the ratings are balanced.

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 2023) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Julian Zimmermann, Associate Director

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