Two to tango

UBS/Swiss/US: It may be time for the US to reassign some of its overworked diplomatic corps. President Obama’s State Department is busy trying to restore the country’s battered image in many far-flung places. But even as ties elsewhere are strengthening, relations with long-time ally Switzerland appear to be weakening.

US tax authorities are responsible for the erosion, with their dogged pursuit of a case against UBS for helping American customers dodge tax responsibilities. The US Internal Revenue Service has scored some justified victories against Switzerland’s biggest bank. UBS admitted guilt, is paying $780 million in penalties and has turned over a few hundred client names.

The UBS lawsuit and wider global pressure have led the Swiss government to backpedal on the country’s tradition of bank secrecy. It has agreed to follow OECD guidelines on tax transparency, in the process conceding some of its hair-splitting pedantry over the differences between tax evasion and tax fraud. It also has signed new bilateral tax treaties with several countries, including the US.

But the US wants still more. Prosecutors are pressing ahead with a lawsuit due to start next week that seeks the identities of some 52,000 American UBS account holders. Where this fishing expedition is concerned, Switzerland looks to be all finished with its pacification efforts.

In a motion filed with the US court, the Swiss government vowed to seize UBS’s client information rather than let the US taxman get its hands on it. This raises the stakes in the legal battle, and potentially invites the spectre of a retaliatory US extreme option: yanking UBS’s banking licence.

Moderation would be more sensible. After turning a blind eye to sordid private banking practices for so long, pressing for ever more concessions at the expense of broader coordination looks excessive. Switzerland has done many favours for the US, including representing US interests in Iran for the last three decades.

The Obama effect isn’t strong enough for the US to afford a no-compromise stance.