http://www.moneynews.com/streettalk/switzerland_broke/2009/02/23/184520.html Economist Artur Schmidt says Switzerland could go broke because Swiss banks extended billions in credit to Eastern European countries which now can't pay back the money.
Switzerland, like Iceland, is threatened with a potential national bankruptcy, Schmidt told the Swiss daily Tagesanzeige.
Loans made in Swiss francs stimulated rapid economic growth in many Eastern European countries, Schmidt says, making Swiss currency very important.
Swiss banks lent francs to local banks, which in turn lent them to their customers. Such loans were especially attractive because interest rates were much lower than required for loans in local currency.
The system worked as long as exchange rates between Swiss and Eastern European currencies remained reasonably stable.
Now Eastern European currencies are falling and more borrowers are having problems repaying their loans.
Because of the devaluations of the national currencies, the debt to Switzerland has increased by more than one-third, Schmidt notes.
Many of the Eastern European countries have serious payment difficulties and are virtually bankrupt.
Schmidt says the value of Switzerland's currency could drop severely or its credit rating could be massively downgraded, creating economic trauma in a country traditionally regarded as a stronghold of financial stability.
The franc could become an unstable, soft currency, Schmidt says.
Then Switzerland would perhaps be forced to abandon the franc and take on the euro.
According to a report from the Bank for International Settlements, worldwide franc-denominated loans of about $675 billion are in circulation, with about $150 billion of that total from Switzerland.
