Our country was in the midst of solid economic growth and was experiencing a strong inflow of foreign workers. In the first three quarters, year-onyear growth amounted to 2.4%, buttressed by all components of global demand except construction. At the end of summer, however, the situation turned completely. The faltering international credit markets and the mounting uncertainty caused global trade to plummet and prompted a decline in growth in our export markets; indeed, most of our trading partners actually went into recession. In the fourth quarter of 2008, Switzerland’s GDP receded to 1.2% and unemployment, which had reached a low-water mark of 2.5%, started to climb again. In our quarterly assessment of last December, we predicted a 0.5-1% drop in GDP for 2009. In March this year, based on the latest data available, we revised the forecast downwards to a 2.5-3% decline. The SNB’s reaction In autumn 2008, as I said, we experienced an abrupt downturn of the economic cycle and, owing to plunging commodity prices, a spectacular change in the inflation outlook. Whereas inflation had been at 3.1% in July, price stability was entirely re-established from November onwards. This reversal forced the SNB to take rapid and decisive measures to ease its monetary policy. In a series of five steps between October 2008 and March 2009, we lowered the target range for the three-month Swiss franc Libor and brought down the market rate from 3% to 0.25%.
In others, the fiscal position is strong enough to stabilize the debt dynamics, but provides little buffer against adverse shocks, and very little room for fiscal policy to help cushion the effects of such a shock. 2  BIS Review 37/2004  •  Important challenges remain in the financial area as well. In many countries, large public sector debt burdens have left banking systems highly exposed to the sovereign, constraining authorities’ room for maneuver. There are also problems in banks’ corporate and consumer loan books, and a number of banking systems also have a large share of foreign currency denominated liabilities, in some cases held by non-residents. •  The durability of recent improvements in external positions, which reflect weak domestic demand in many countries, is also open to question. As domestic demand strengthens, external balances could move into deficit again, which in some cases will reintroduce a greater external risk. •  And in many cases, the financial exposure of the IMF and the multilateral development banks is already high. These balance sheet challenges took a long time to develop, and they will take a long time to reverse. They are the legacy of years of past fiscal decisions, magnified by the impact of crises on growth, the exchange rate, and the financial sector. They leave an exacting set of policy challenges.