ZURICH (MNI) – Swiss economic growth is expected to slow as the
strong franc weighs on exports, but the slowdown should be temporary as
global growth picks up, uncertainty decreases and the FX rate returns to
its long-run trend, the Swiss National Bank said on Thursday.

However, the central bank warned in its Financial Stability Report
that the combination of sluggish growth, sovereign debt and banking
issues, along with lasting imbalances in the real estate market could
lead to “another round of financial instability” in the Eurozone.

“In Europe, growth will be more subdued under the baseline
scenario,” the SNB predicted.

“High unemployment and fiscal austerity measures will take their
toll on the recovery, while persisting inflationary pressures will force
the European Central Bank (ECB) to pursue its tightening cycle.”

The SNB did not rule out an “adverse scenario” for the next year,
which would involve slow growth in the Eurozone leading to
“unsustainable sovereign debt burdens,” further downgrades by credit
rating agencies and possibly debt restructuring.

“This adverse scenario is likely to trigger another bout of
financial instability and to significantly dampen European and also
global growth, reflecting the cross-country interconnectedness of the
financial sector and the rise in global uncertainty,” the SNB warned.

Turning to the global economic environment, the SNB noted that
risks and uncertainty remain high, and that a decline in activity over
the next 12 months “cannot be ruled out.”

“Under such an adverse scenario, big bank losses relative to
capital could be considerable, given their risk profile,” the SNB said.

“In view of the ongoing high risks associated with the economic
environment, as well as these banks’ continuing high leverage and the
enhanced regulatory requirements, it is particularly important from a
financial stability perspective that the Swiss big banks continue to
strengthen their loss-absorbing capital base,” the bank added.

Under the bank’s baseline scenario, however, the SNB projects
further improvement in the Swiss banking sector’s economic and financial
environment. Still, the central bank stressed that risks remain high.

“Against this backdrop, short and long-term interest rates should
increase further in most countries,” the SNB said.

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