By Emma Thomasson
ZURICH (Reuters) - In early August, Philipp Hildebrand pulled out of an expedition to mark the bicentennial of the first ascent of the Jungfrau, one of the highest mountains in the Alps.
As the bosses of some of Switzerland's leading companies climbed through hail to the summit, the country's top central banker took on the markets. He slashed interest rates to zero and flooded the banking system with cash, in what was to be another futile attempt to bring the Swiss franc down from recent peaks.
Hildebrand has often cut a lone figure since taking over as head of the Swiss National Bank (SNB) at the start of 2010. The franc has been chased skyward by frightened investors seeking a haven in the euro crisis, gaining almost 40 percent against the euro since 2008 -- and Hildebrand has been criticized at home for his failed attempts to ground it.
"I hope that the national bank succeeds with the intervention this time so it gets some better press," Andreas Meyer, head of the Swiss national railway company, told Blick, a newspaper, on his way back from the top.
Perceptions matter in central banking, as Hildebrand, a 48-year-old former hedge fund manager, knows. The suave polyglot's early attempts to cap the rise of the franc forced the SNB to book 19.2 billion francs ($22.3 billion) in losses last year.
Many Swiss turned on him, including the popular anti-immigration Swiss People's Party (SVP) which accused him of trying to use his interventions in the foreign exchange markets to single-handedly save the euro from collapse.
Apparently banking on that lack of political support, markets took little heed of Hildebrand's early August moves, pushing the franc close to parity with the euro on August 9 -- a jump of 18 percent in as many days.
But in the past three weeks, Switzerland has finally moved behind its central bank head. As the franc climbed yet further, business leaders, consumers, trade unions and even the most cantankerous politicians have been calling for action. On September 6, the SNB took the drastic step of setting a formal franc cap, a move that immediately forced the franc 8 percent lower.
"The action of the SNB was preceded by a noticeable shift in opinion in Swiss politics," Tages-Anzeiger, a daily newspaper, wrote on Tuesday. "Since August this criticism has been silenced, and politicians from left to right have given the SNB advance support for all measures that they could take to weaken the Swiss franc."
HOT MONEY HURTS
Can the Swiss maintain their united front?
Hildebrand's biggest critic has been Christoph Blocher, the SVP's mastermind and a fierce defender of Swiss independence from the European Union. Blocher had argued that interventions are a waste of money and that exporters could cope.
But as the debt crises in both the euro zone and the United States have dragged on, investors have poured into a shrinking pool of safe havens: gold, art, and a handful of currencies including the franc.
"The bloody euro zone's mucking it all up," one SNB trader shouted down the phone at a Zurich foreign exchange dealer in late August.
In times of crisis, Switzerland has discovered, you can have too much of a good thing. the country's political stability, healthy government finances and wealthy economy have "contributed to a continuous real appreciation of the Swiss franc if you go back 30 years," Fritz Zurbruegg, director of the Swiss finance department, told Reuters last week. "The problem right now is the speed at which this appreciation has happened."
Concern that the franc's strength would tip the economy into recession have started to hurt the SVP, which is part of Switzerland's coalition government, in particular. The party has been plastering the country with anti-immigrant posters ahead of parliamentary elections on October 23, but what voters want to know is what politicians are going to do about the franc.
Polls show waning support for the SVP; many voters have shunned the party's proposal that employees work longer hours to help companies stay competitive.
Consumers have abandoned local stores and flocked across the border to buy fuel, food and clothes in the euro zone. Tourist arrivals are down and companies such as drugmaker Roche, banks UBS and Credit Suisse and food giant Nestle have all reported that the currency hit first-half results.
Nick Hayek, chief executive of watchmaker Swatch, led calls for an exchange rate target, warning that sales could suffer unless the franc was reined in and using the pages of SonntagsZeitung newspaper to tell Hildebrand he "should not allow the criticism -- from the politicians, the cantons or the journalists -- to intimidate him."
That was late July. The mood really turned in the middle of August. Switzerland's finance and economy ministers interrupted their summer holidays for an emergency meeting and called Hildebrand to Bern for a briefing on the franc.
The SNB said it would expand its measures to fight what it called the franc's "massive overvaluation". The franc started to drop.
But markets only really started to listen when Blocher joined in.
"We are now fighting an economic war against all those who are going into the franc," Blocher told Swiss television. He reversed course on interventions and said he would support the SNB fixing a threshold for the franc.
Georg Lutz, political scientist at Lausanne University, said the main reason for the change was the party's slip in the polls. "The SVP didn't really present any good ideas in this respect," said Lutz. "They noticed that their arguments were leading into a dead end and they realized that it was causing serious damage..."
At the same time, the influential Weltwoche magazine, a right-wing weekly that is closely aligned to the party and was fiercely critical of last year's interventions, praised the central bank's recent actions.
"Why should ... a serious error a few months ago now be right?" Weltwoche editor Roger Koeppel asked in a column. "First... the franc is ridiculously strong as shown by a price comparison of goods at home and abroad.
"Second, the Swiss economy wasn't on the edge of a precipice last year when the SNB intervened in an excessive and panic-stricken way. Today, parts of the economy are threatened with lasting organ-damage due to the strength of the franc."
The magazine also carried a column by former SNB chief economist Kurt Schiltknecht raising parallels with 1978, when he was at the central bank and it last set a formal exchange rate target in the aftermath of an oil crisis.
"Moving to an exchange rate target is associated with numerous risks," he wrote. "But it would be wrong to forgo decisive action in the currency markets because of these risks."
That message was echoed at a meeting in Bern of Swiss government ministers with the main political parties -- including the SVP -- last Friday.
"All federal political parties and the government stood expressly behind the measures the Swiss National Bank has taken," the government said in a statement after the meeting.
It was the encouragement Hildebrand needed, and as the franc spiked again on Monday September 5, the SNB plotted its moment to pounce, issuing a short statement at 10 a.m. the following day that jolted traders over their mid-morning coffee.
"The euro was going back toward 1.10. The (SNB) board had probably set this value as the trigger for the next intervention," said Ulrich Kohli, SNB chief economist until 2009 and now Geneva University finance professor.
"There was huge pressure from the press and politicians that the SNB had to do something," he told the Blick daily. "That creates the impression that the board gave into this pressure which is very unfortunate."
Kohli -- another outspoken critic of last year's interventions -- is already skeptical about the new measures. "If the national bank is perceived as being credible then it won't have to use so much money to defend the exchange rate target. That would be a success. But the risks that they make massive losses and that inflation rises (are) also considerable."
Jon Cox, head of Swiss research at Kepler Capital Markets, calls Hildebrand "the John Wayne of the central bank world" for his shoot-from-the-hip action. The franc has stayed below the SNB target rate since the announcement on Tuesday and even weakened slightly on Thursday to trade at 1.21 euros.
"We believe the Swiss National Bank's move to keep the franc at 1.20 franc versus euro is credible, at least until the end of the year," said Cox. "After that, only time will tell. Central banks working in isolation have rarely been able to influence currencies on a long term basis."
BUYER OF LAST RESORT?
More political pain lies ahead for Hildebrand, who has spent the past couple of months recovering from a bad fall from his mountain bike.
Any losses the SNB books make it less able to pay its regular dividend to its shareholders -- principally Switzerland's 26 cantons which rely on the income the bank provides. As the possibility of budget cuts hits home, criticism of Hildebrand will almost certainly return.
It was perhaps significant that when he announced the currency target, the SNB chief spoke alone -- he usually appears with his two co-board members. The costs might be very high, but the SNB was acting "in the interest of the country as a whole," he said.
"Basically he has bet the farm, and the price to Switzerland for getting it wrong is enormous," said Chris Cruden, chief executive of asset manager Insch Capital. "The cantons are already squeaking because they are not getting their pay checks.
"I have enormous sympathy for Hildebrand. He would have been pilloried for doing nothing, but ... is he going to be the buyer of last resort for the euro?"
(Additional reporting by Catherine Bosley and Martin de Sa'Pinto; Edited by Simon Robinson and Sara Ledwith)