Governments around the world have turned to their lenders as they scramble for money to limit the economic impact of the Covid-19 pandemic.

Switzerland is no exception. Bern has committed nearly CHF 50 billion to loans, guarantees and extra spending. Slewing state finances further is a severe economic contraction prompted by the pandemic. Forecasts differ and have become somewhat less gloomy of late, but gross domestic product this year is expected to fall by between 5 and 7 percent. Negative growth, higher spending and lower tax revenues mean the pandemic will prompt a 6-9 percentage point rise in Switzerland’s public debt to GDP ratio, according to a recent Avenir Suisse research, printed in a series of scientific blogs.

How much can Switzerland afford to borrow? Before the crisis, the affluent country stood out from its neighbors for the extraordinary resilience of its public finances. State spending had remained in surplus for years, in spite of assorted external shocks: annual overshoots compared to initial budgetary forecasts had become almost embarrassing for the finance ministry.

How much debt a country can comfortably live with is moot. Estimates for the safety margin differ from the 60 percent debt to GDP ratio proscribed by the European Union’s Maastricht criteria to significantly higher levels suggested by other authorities. Even then, matters often depend on an individual country’s specific circumstances: Japan’s debt to GDP ratio stands at an eye watering 200 percent or more, but causes little worry among investors or economists.

So theoretically at least, Avenir Suisse’s forecast of a jump in Switzerland’s debt to GDP ratio to around 35 percent this year (from 26.4 percent at the end of 2019) is not too troubling. The figure is expected to decline thereafter as economic activity recovers. Of course, matters could turn out worse in the event of a second wave of Covid-19 infections and further upheaval.

Less bad than it seems

While dramatic by Swiss standards, such numbers are relatively tame compared with many other countries. Switzerland itself has seen big leaps in its levels of state indebtedness at specific periods – most notably wartime – when, though a non-combatant, international disruption prompted economic decline and potentially higher state spending.

Other European countries, notably Germany, France and the UK, are currently lavishing vast amounts to protect their economies from the worst of the crisis – mainly through job subsidy schemes, credits and guarantees, and other one off measures. The impact for some will be dire: Italy’s already debt to GDP ratio is expected to reach a vertiginous 160 percent this year.

(Pataporn Kuanui, Shutterstock)

Switzerland’s relative stability is partly a consequence of its so called “debt brake” a mechanism introduced in 2003 to prevent excessive borrowing. In recent years, the measure has received extensive outside attention and even been copied in Germany.

The debt brake came into being after the bursting of a big real estate bubble focused on French speaking cantons that sent the economy tumbling and the debt to GDP ratio surging past 40 percent for a while.

Not out of the woods

In spite of the brake, Switzerland still faces potentially very severe financial problems, notably because of funding gaps in social security and state pensions. No wonder: the debt brake is not (yet) applied for the social insurance system that was criticized by Avenir Suisse on several occasions like in their 2017 publication ”A liberal shadow budget.

How long Switzerland should take to pay down its Covid-caused surge in borrowing is another open matter. The Avenir Suisse study suggests a target range of 15 years – though everything, of course, depends on the duration of the pandemic, let alone unforeseen events in future. But the conclusion is that, while having no reason to relax, the Swiss situation is at least a good deal more reassuring than most other European countries.