By James G. Neuger, Joshua Gallu and Simone Meier
Dec. 1 (Bloomberg) — An isolated European country with an economy geared toward finance and winter sports is no longer a monetary bastion as credit evaporates around the globe. Banks teeter, the once-impregnable currency depreciates and a proudly independent people question whether a centuries-old go-it-alone strategy can survive.

Even Switzerland is wondering if it’s immune to the forces ravaging Iceland.

The drama playing out in the Nordic nation, whose economy the International Monetary Fund says may shrink about 10 percent next year, offers a cautionary tale for the no less fiercely independent Swiss. While they are in far better shape, their status as custodians of the world’s wealth is under threat by a global economic upheaval they can’t control and miscues by the banks that made them great.

“The Swiss model of isolationism is not an advantage” in the current environment, says Michael Baer, 46, the great- grandson of Julius Baer, founder of Switzerland’s largest independent wealth manager. “Switzerland is absolutely not immune to global developments, especially not as regards the financial crisis and the economy.”

Baer — scion of a legendary family in one of the world’s oldest financial centers — has moved his own business to one of the youngest: In 2006, he set up Baer Capital Partners in Dubai to tap Middle Eastern wealth.

For the 7.6 million Swiss, signs of stress are evident amid a cataclysm in world markets that has besieged them with reasons to doubt a splendid isolation dating back to medieval times.

Europe’s Biggest Losses

While the Swiss Market Index has outperformed the Nasdaq Composite Index this year, it has still lost 31 percent of its value. Zurich-based UBS AG, Switzerland’s flagship bank, amassed Europe’s biggest losses in the credit crunch, forcing the government and central bank to offer a $59 billion helping hand. The franc has tumbled against the dollar. And the banking secrecy that attracts offshore wealth is drawing more fire than ever.

Slowly, the pain on Zurich’s Bahnhofstrasse — the boutique- and bank-lined promenade through Switzerland’s largest city — is trickling through to main streets countrywide.

Switzerland’s economy will shrink 0.2 percent next year after expanding 1.9 percent in 2008, the Organization for Economic Cooperation and Development said on Nov.25. Manufacturing contracted the most since at least 1995 in November, a report showed today. While the 2.6 percent jobless rate is low by global standards, unemployment rose for the first time in five years in September and is heading higher.

Reeling

UBS and Zurich-based Credit Suisse Group AG, the No. 2 bank

To contact the reporters on this story: Simone Meier in Frankfurt at smeier@bloomberg.net; Joshua Gallu in Zurich at jgallu@bloomberg.net; James G. Neuger in Brussels at jneuger@bloomberg.net
Last Updated: December 1, 2008 05:11 EST

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