Swiss Developments and a bit of Hungary

There are several developments in Switzerland that investors should be aware of today.

First, Germany and Switzerland appear to have struck the basis for an agreement on a new tax treaty. This generally seen as Swiss franc negative and was cited as a factor for euro gains against the Swiss franc before the weekend.

Second, a Swiss government panel is set to recommend that the two large Swiss banks should be required to maintain greater capital that required by Basle III. This is among the first indications of a country trying to address the "too big to fail doctrine" with special capital requirements. There is speculation that Swiss banks may look at issuing contingent convertible bonds.

Third, there is more talk that some central European banks are looking to reduce their Swiss franc loan book. The focus has been on Hungary, where as of the end of June 2010, the central bank reported that households have about HUF7.3 trillion (~$35 bln or ~26 bln euros) of foreign exchange loans. The central bank estimates that roughly 80% of that foreign currency exposure is accounted for by the Swiss franc. Some 1.8 mln people have foreign currency loans, mostly mortgages. The latest data suggest some 400k or about 22% delinquent, including 100k who are more than 3 months behind.

Meanwhile, Hungarian Prime Minister Orban's Fidesz Party did as well in the weekend's local elections as could have been imagined, carrying 22 of 23 large cities, including Budapest for the first time. Today's bill auction was well over subscribed.

With a reinforced mandate, Orban can make some tough fiscal decisions. Since his cabinet re-endorsed the 2011 budget deficit target that was part of the terms of the 2008 bailout on Sept 8, HUF is among the strongest EM currency. Orban seems to be focusing on boosting revenues more than cuts in spending and this does not appeal to investors or the rating agencies. Moody's and S&P have the sovereign rating on watch.