The Schweizfonds: A Second Relief Pillar of 100 Billion Francs

With the most recent radical emergency measures decreed by the Swiss federal government, the campaign against the coronavirus pandemic has finally reached a level that might efficiently protect the health of the population. The goal must not only be a deceleration of the spread of the infection in order to reduce the risk of overstressing hospitals and to gain time to build up capacities, but also to reduce the total number of infections over the course of the year. In order to reach this goal, the full deployment of those who provide for the medical treatment and basic needs of the population is necessary. Also necessary, however, is the full commitment of civil society, which must consequently and thoughtfully follow all necessary new rules of behaviour such as social distancing and handwashing, and must strengthen neighbourly help practices to support the most vulnerable members of society.

Endangered economic system

In ever shorter intervals massive economic problems will now surface. Employees already fear that they will lose their jobs. Many companies are seeing their revenues plummet: Demand ceases as clients stay at home, while the switch to online trade may be only partly possible or not at all, for various reasons. Production itself may become impossible. The tourism sector is an extreme example, but other sectors are increasingly being affected as shops are closed, skilled labour commissions are cancelled, and non-medical services involving contact with clients have to be discontinued. Many companies are at risk of bankruptcy, and the threat of the irreparable loss of physical and human capital is with us, and with it the loss of all the investment placed in this capital.

Such an extensive risk of bankruptcies in the real economy will lead to problems in the banking sector. Large adjustments of value will affect securities held by banks. Thus imbalances may arise in banks that will not be superable without government aid. This dynamic will lead to a decrease in the quality of the loan portfolios on the banks’ books, and this will endanger the ability of the entire finance system to function.

The Swiss Federal Council has already reacted by simplifying the changeover to reduced working hours and setting aside a volume of 10 billion Swiss francs for supportive measures. Such a policy may be efficient in the case of a sharp recession, and it helps, of course, to stabilise wage incomes. However, it is not sufficient for the dynamic that we are seeing now, and for four reasons. First, this dynamic will probably lead to a loss of value of far more than 10 billion francs. Second, reduced working time monies will only partially avert company bankruptcies: Considerable expenses incurred by companies are not connected to labour. A lot of capital is tied to machines, buildings and inventories, and service contracts have to be fulfilled. It is also not possible for all companies to utilise reduced working time monies. Third, the government’s packet of measures cannot solve the liquidity problems of companies; and fourth, it does not adequately stabilise the banking system.

A second relief pillar with 100 billion Swiss francs

Next to the already established first relief pillar to support the labour force, we therefore suggest establishing a second pillar of support with a “Schweizfonds”, a Swiss relief fund, with an initial volume of 100 billion Swiss francs, which will make up for the deficiencies in the current measures for a certain time. This fund should be used to replace a significant portion of lost value, whereby these replacement payments will be calculated along with the reduced working hours monies. We have to quickly become clear on how this second pillar of support could simply and efficiently be set up. For example, value added tax accounts could be used to make the compensatory payments. But the banking system could also provide this compensation in the form of government-guaranteed credits. The added value compensations should in any case be largely paid back by the companies, albeit at favourable conditions and over a long period of time. Taken together, these measures ought to ensure that the great majority of companies can come through the crisis and still be solvent.

A credible organisation for distribution

Because there are very many companies in question, we need a simple set of regulations. The replacement of lost added value should lie close to 100% but not at 100%, and should be calculated according to the most recent added value history of each company. For the distribution of monies and the granting of bank credit guarantees, a credible organisation should be responsible, one that is set up on the federal level and uses objective criteria for the distribution of support. A steering committee should then make the final decisions. For very large sums a consultation could ensue, for example with the Federal Finance Commissions.

The number 100 billion is merely a rough calculation of the costs for the reduced work monies and for the substantial compensation for added value losses; one can and must imagine diverse scenarios. For most scenarios a smaller sum would suffice, but others might require still more. For now, a magnitude of 100 billion should be envisoned.

We should also temporarily suspend the obligation to file for insolvency. In addition, further government guarantees can help companies to receive bridging loans from banks. And the Swiss National Bank should prevent potential imbalances within the banks with appropriate liquidity support. It will soon become apparent if further measures are necessary to protect the operating modes of the banking system, for example in the granting of credit and in the payment system.

Naturally, companies can also do their part to avoid chains of bankruptcies. For example, contract durations can be extended for the estimated time-frame of the emergency in order to prevent shortages of liquidity. In longstanding business partnerships, mutual trust should allow to find new and innovative arrangements that will help see these partnerships through the crisis.

Suspension of debt brake

A Schweizfonds of 100 billion francs requires an enormous mobilisation of the means of the state. The debt  brake will have to be suspended. But Switzerland’s fiscal situation is favourable. Besides, the fund would in no way endanger the creditworthiness of the country, as long as Switzerland returns to the same economic level as before the beginning of the crisis. If the pandemic runs as planned and the Schweizfonds is implemented as we propose, there is a strong probability that a catch-up dynamic will establish itself, on the back of which we could return to pre-Corona levels.

In addition we should discuss unusual financing measures. The National Bank, for example, could help to carry a portion of the Schweizfonds with an extraordinary disbursement. The advantages and disadvantages of such a disbursement must be carefully weighed, but in principle we should not exclude this measure from the start.

Securing the economic well-being of Switzerland

Such an extensive crisis package and the radical measures that would be necessary for its realisation naturally give rise to worries from a regulatory policy perspective. One does not want to artificially keep companies running that would have gone bankrupt anyway. In addition it would be painful, even temporarily, to give up the debt caps that took such great efforts to introduce. Overall, however, this epidemic is a unique shock, and the campaign against it will not deliver a blueprint for tackling further crises – negative incentives can therefore hardly arise from these measures.

Germany uses the slogan “Whatever it takes” to master its economic problems. This maxim demonstrates its great determination and its will to sustainably protect its economy, even if no fiscal authority could realise it in every conceivable situation. With similar scope and the same radicalness, but in a more down-to-earth and cautious manner, the Schweizfonds should be established in order to secure the economic well-being of Switzerland: not “Whatever it takes”, but “The Swiss Way”!