What could upset the World Economic Forum? That’s what founder and executive chairman Klaus Schwab says was on his mind early last week.
It was just days before the single-most important event on Schwab’s calendar: the annual meeting he convenes for world leaders, corporate chieftains, investors and economists in the Swiss mountain town of Davos. So much was in flux — the tumbling price of oil, the economic crisis in Russia, the threat of terrorism hanging over Europe.
By Thursday, he had the answer: The Swiss National Bank would abandon its foreign-exchange limit on the franc.
“I have to be frank, we had a meeting of our managing board and I predicted that it will happen,” Schwab said in an interview with Bloomberg Television to be broadcast today. “If the Swiss wanted to move, they had to move before the 22nd of this month,” when the European Central Bank is set to begin a bond-buying program known as quantitative easing. “It was clear.”
Schwab was right. On Jan. 15, the SNB suddenly removed its cap on the value of the franc, set more than three years ago at 1.20 euros. The franc surged as much as 41 percent that day, a stunning move almost unprecedented in the modern history of currency trading.
What seemed obvious to Schwab was anything but that for banks and foreign-exchange houses the world over. Citigroup Inc. lost more than $150 million, according to a person briefed on the matter. Deutsche Bank AG lost $150 million and Barclays Plc less than $100 million, people familiar with those situations said.
FXCM Inc., the largest U.S. retail foreign-exchange broker, got a $300 million cash infusion from Leucadia National Corp. after warning that client losses threatened its compliance with capital rules. Two firms, Global Brokers NZ Ltd. and Alpari (UK) Ltd., said they were forced to shut down amid the market turmoil that followed the SNB decision.
“Of course, everybody was surprised last week by the decision of the SNB,” says Schwab, 76.
A year of planning goes into every WEF annual meeting. Programs must be set, topics must be chosen for panel discussions, speakers must be invited. Yet fate has a way of spoiling even the best-choreographed agenda: the Arab Spring in 2011 and the financial crisis in 2008.
Schwab said he raised the question — “What could upset the WEF?” — at the Jan. 12 meeting of the managing board.
Three days later, while at a lunch, he learned in an e-mail from a colleague that his prediction had come true.
The revaluation of the franc blindsided Swiss industry. Swatch Group AG (UHR) Chief Executive Officer Nick Hayek captured the mood as the benchmark Swiss Market Index of 40 stocks tumbled 14 percent in two days: “Words fail me,” he said on Jan. 15.
Schwab, a Ph.D. in economics who since 1979 has published the annual “Global Competitiveness Report,” says the country will adjust to the stronger franc.
“Switzerland has to succeed now even more by having a service-oriented attitude, by doing it better, maybe at a higher price, than the rest of the world,” he said in the interview. “It means of course we are also more expensive.”
Companies pay the WEF 600,000 francs to be strategic partners. That’s the equivalent of $683,000, up about 15 percent since before the SNB dropped the exchange-rate cap. The higher cost is unlikely to inspire much pity. While the WEF’s mission is “improving the state of the world,” and non-profits do play a prominent role, for many participants the annual meeting is as much a social event as a forum for ideas.
Billionaires and oligarchs mingle with celebrities such as Bono, Matt Damon and Charlize Theron at Davos events. This year’s WEF annual meeting runs from Jan. 21 through Jan. 24.
Would Schwab ever consider moving the meeting to a cheaper location? Not a chance.
“Davos is the ideal place because it offers the right atmosphere, it has the ideal infrastructure in terms of the Congress House, in terms of the hotels,” he said. “I think it’s worthwhile what we are offering.”