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Special report - The trials of Philipp Hildebrand
June 14, 2011 / 6:16 AM / 7 years ago

Special report - The trials of Philipp Hildebrand

ZURICH (Reuters) - Philipp Hildebrand learned the value of perseverance at an early age, when as a freestyle champ he narrowly missed qualifying for the 1984 Olympics. It’s an experience he’s drawn on in a rocky chairmanship of the Swiss National Bank since he took up the post in January 2010.

Swiss National Bank Chairman Philipp Hildebrand attends the general shareholders meeting in Bern April 29, 2011. REUTERS/Ruben Sprich

The 47-year-old former hedge fund manager has faced down calls for his resignation after he risked state funds to try halt the rise of the Swiss franc last year, an effort which cost the central bank 26.5 billion francs. The currency has since gone on to hit more record highs against the dollar and euro, and such huge foreign exchange losses mean Hildebrand is unlikely to take on markets again in a hurry.

But he has not been cowed. Swimming is a very good learning process for life, points out his former coach Anthony Ulrich. “It’s an endurance-oriented sport,” he says. “You learn to lose and keep your head above water at the same time.”

Central bank heads in post-crisis Europe face many stiff challenges. For his next test, Hildebrand -- one of a new generation in Europe taking over as familiar figures like Jean-Claude Trichet, Axel Weber and Nout Wellink move on -- has set his sights on another ambitious target: big banks. Pushing tough plans to force banks like UBS and CSFB to be more prudent than their global rivals, he’s made enemies at home. Internationally, he’s building an image as a trail-blazing regulator.

“He’s one of the best central bankers around,” said Charles Wyplosz, economics professor at Geneva’s Graduate Institute, who taught with Hildebrand up to 2007. “He is up against two very big Swiss banks. These are some of the most powerful lobbies in the world. That takes a lot of personal courage.”


Hildebrand remembers the start of the financial crisis quite clearly. It was August 2007 and he was on the last day of his summer holidays in the Swiss Alps when his phone rang. It was the SNB’s trading desk, calling to tell him global risk premiums had jumped, signalling the start of a liquidity crunch as banks stopped trusting one another. It was also the start of a steep climb for the safe-haven Swiss franc.

Since then, the world’s sixth most traded currency has gained over 20 percent against the dollar and almost 30 percent against the euro. Investors worried about the United States’ fast-growing debt and the euro zone’s failure to fix its problems have piled in. Swiss manufacturers were already complaining about squeezed profits on exports and having to compete against cheaper imports.

By early 2009, when Hildebrand was vice chairman, the Swiss economy was in its worst recession since World War Two and the SNB had already slashed interest rates to rock bottom. The bank was so concerned about the risk of a deflationary spiral it decided to act, buying euros in the foreign currency markets. That worked, at least for a while, and by December the SNB had decided the economy was on the mend and the currency had stabilised.

Then in January 2010, Philipp Michael Hildebrand took over as the youngest president in the history of the century-old bank. Born in the Swiss capital of Bern, he had studied -- mostly politics and international relations -- in Toronto, Florence, Harvard and Oxford.

Though he was no economist, Hildebrand knew the territory. His first real job had been with the World Economic Forum in Geneva, organising speakers from the financial services industry for its annual talkfest at Davos. They included George Soros, who had made his fortune betting against the Bank of England, and who helped him get a position at New York-based hedge fund Moore Capital Management, which specialised in speculating on interest rate futures and monetary policy.

As a young hedge fund manager, Hildebrand had in 1996 written a letter to influential Swiss newspaper Finanz und Wirtschaft, demanding that the SNB intervene to weaken an overvalued franc. “The markets are powerful but they often also allow themselves to be led,” he asserted at the time. (He declined to comment on the record for this report.)

Scarcely had he settled into his new office at the edge of Lake Zurich -- hanging a favourite black and white photo of childhood idol Mohammed Ali on the wall -- when he was called into action. With the franc soaring again during the euro zone debt crisis, to around 1.4 per euro, Hildebrand ordered another round of massive interventions. Between February and May 2010, the SNB bought 147 billion francs in foreign currency, about a quarter of Swiss GDP. The markets sensed the SNB’s desperation as it tried to move the market in thin Asian trade.

“The SNB wanted to make the biggest splash they could,” one trader said. “They wanted to take the speculators out of the game by squeezing their positions.” A month later, with the franc still rising, the SNB ditched the policy.

That year the bank booked a 20 billion franc loss, the biggest in its history. It may yet have to suspend an annual payout to local governments, prompting belt-tightening that the wealthy Swiss have so far largely avoided.

It was a hard lesson. “Historically, central bank intervention has a short-term effect but in the long run it always loses,” said Geoffrey Baker, managing director and currency strategist at Insch Capital. “Hildebrand seemed to have more market knowledge than most and decided to throw in the towel.”


Retaining the habits of a hedge fund manager, Hildebrand still rises early to read the papers and keep an eye on the markets on the screen in his office. There he can see that he’s up against profound forces and has only limited tools to check them.

The SNB is not the only central bank to have the problem of a strengthening currency. Last September, a bid by the Bank of Japan to weaken the yen failed after its intervention met global opposition: there were warnings of currency wars between rival exporting nations. The combined firepower of the Group of Seven rich nations did succeed in stabilising financial markets in March, when their first joint intervention since 2000 stemmed a sharp rise in the yen in the wake of the earthquake.

But Hildebrand has had no such support. Since last June when he stopped intervening, investors on world markets have pushed the franc even higher. It hit a new record around 1.2004 per euro this week and a new peak against the dollar on June 7, its appreciation fuelled by Switzerland’s stability -- and a low debt-to-GDP ratio of 53 percent according to the IMF -- as other parts of the world were hit by revolution and economic crises.

Rabobank market economist Emile Cardon says the SNB could not have predicted Japan’s disaster, nor the ongoing weakness of the U.S. economy: “There used to be three safe havens, with the Japanese yen and the U.S. dollar, but after the earthquake and weak U.S. growth, the only remaining safe haven is the Swiss franc.”

Already last June, Mansoor Mohi-uddin, chief currency strategist at UBS, was arguing the franc is increasingly seen as a proxy for the old German mark: “Switzerland’s currency already acts as an indicator of Germany’s economy,” he said in a report, noting that 20 percent of Swiss exports go to Germany.


Whatever the economic reality, the political recriminations for Hildebrand have been torrid, especially from Switzerland’s right wing. They said the government should have been more wary of appointing a former hedge fund manager with no qualifications in economics.

“How hard is Hildebrand?” Weltwoche weekly wrote. “After a meteoric rise, sceptical voices are increasing. Is the man as hard as the currency which he has to direct through the euro crisis?”

Christoph Blocher, mastermind of the right-wing Swiss People’s Party, has kept up the pressure, calling on Hildebrand to resign and likening the losses to the folly that brought Switzerland’s biggest bank UBS to its knees. “What the SNB did was megalomania or incompetence. At the beginning of 2010 they thought they could save the euro from collapse,” he told Reuters. “Nobody can do that, not even the Americans.”

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