Swiss capital controls could be last resort if franc surges: UBS

[ZURICH] Switzerland could impose controls on cash withdrawals from banks if all else fails in its battle to rein in the safe-haven Swiss franc, UBS's chief economist for Switzerland has suggested.

Daniel Kalt made clear on Thursday such drastic measures were highly unlikely and could only be a last resort in severe market turbulence. He stressed this was his own conjecture, not something he had heard the Swiss National Bank was planning.

Limiting cash withdrawals could make holding francs less attractive in the eyes of domestic and foreign investors, he said. "This would be a really strong signal," Mr Kalt told Reuters.

The SNB declined comment, reiterating only that it had not excluded any potential policy tools, including capital controls.

The franc soared in January when the SNB scrapped its cap of 1.20 francs to the euro. It has stabilised around 1.05 to the euro this week despite jitters over Greece's debt crisis.

The SNB has already adopted negative interest rates, a charge on some cash deposits and currency intervention as ways to keep the franc from rising.

"In an extreme scenario if the SNB had to push interest rates further into negative territory (Switzerland) could be forced to introduce some kind of capital controls to prevent circumvention of negative rates via holding cash," Kalt said.

Banks so far have not passed on negative rates to retail savers, but could do so if official rates turn even more negative. This in turn could prompt savers to pull cash out of banks and horde 1,000-franc notes at home, Kalt said.

To discourage this, Switzerland could either limit withdrawals to a few hundred francs a day or else make banks charge more for withdrawals than savers actually take out, thus imposing negative rates on cash holdings as well.

Mr Kalt said controls would not have to limit international capital flows but had to be viewed warily, given the blow they would deliver to Switzerland's reputation as a liberal and stable financial centre.

REUTERS