Oct. 20 (Bloomberg) -- Sweden pledged as much as 1.5 trillion kronor ($205 billion) to guarantee loans and created a fund that may buy shares in banks as it looks to revive lending in the financial system.

The guarantee will cover ``more or less all types of bonds, bank certificates and other loan obligations'' with an original maturity of between 90 days and five years, Finance Minister Anders Borg and Mats Odell, Sweden's financial markets minister, said in Stockholm today.

The U.S., the U.K. and the European Central Bank have made similar moves in the past two weeks to shore up banks and avoid financial gridlock. The policies have worked, with interbank interest rates now on their way back down. Libor for three-month loans in dollars fell 8 basis points to 4.42 percent on Oct. 17, capping the first weekly decline since July.

``These measures will improve the liquidity situation,'' said Henrik Mitelman, Chief Strategist at Skandinaviska Enskilda Banken An in Stockholm. ``It's a very ambitious program and includes a wider range of securities than the European program.''

Interbank lending had evaporated after Lehman Brothers Holdings Inc. filed for bankruptcy on Sept. 15, shattering confidence and sending corporate borrowing costs to record levels. Sweden's overnight interbank lending rate, or Stibor, reached a high of 6.475 percent on Oct. 6, before dropping back to 4.45 percent today, compared with the benchmark repo rate of 4.25 percent.

Stability Fund

Banks that get access to loans through the program will have to agree to restrictions on salary and bonus increases, the government said. Funds will initially be available until April 30 next year. The government also said it won't guarantee ``complex and structured products.''

Under the plan, the government set aside 15 billion kronor in a stability fund to buy shares in banks if they are at risk of default and are ``important to the broad financial system.'' The fund would buy preference shares with ``strong voting rights.''

All financial institutions will have to pay a special stability fee once the market situation has improved, the government said. It will seek parliament's permission to become the owner of financial firms by force if needed.

The government raised the guarantee on bank deposits to 500,000 kronor from 250,000 kronor on Oct. 6 to ease concern about the stability of the financial system. That is financed by an existing bank deposit guarantee fund which has 18 billion kronor.

Foreign Banks

The government will also guarantee deposits at foreign banks with clients in Sweden if their respective governments are unable to do so, and widened the types of accounts covered.

Sweden's central bank has said it will lend as much as 5 billion kronor to the Swedish subsidiary of Kaupthing Bank hf, Iceland's largest bank, after the unit failed to meet payment obligations and was put up for sale. Sweden is in talks with Iceland, whose three largest lenders have been taken over by the government, Borg said in an interview in Berlin this afternoon.

``We'll try to be a good neighbor but eventually this is up to Iceland because they have to get into an IMF program -- an essential part of them re-establishing themselves,'' said Borg.

Iceland's financial regulator took control of Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Bank hf this month, after they couldn't secure short-term funding. A mission from the International Monetary Fund was on the island last week to design a potential plan, and Iceland is also trying to secure an emergency loan of as much as 4 billion euros ($5.4 billion) from Russia after efforts to get aid from western states failed.

Sweden's parliament will vote on the guarantee plan on Oct. 27, and if the program is passed, it will be introduced Oct. 28.

Sweden's Riksbank cut its key rate for the first time in more than three years on Oct. 8 as part of coordinated effort among central banks to ease the global credit crisis. Sweden's economy grew an annual 0.6 percent in the second quarter, matching the slowest pace in more than 11 years, and unemployment rose for the fourth consecutive month in September.

The crisis is ``going on longer than anybody expected'' and there ``are still problems down the road,'' Borg said, adding that he hopes the rescue packages introduced in Europe and around the world have lain the ``foundation for stability.''

To contact the reporter on this story: Niklas Magnusson in Stockholm at nmagnusson1@bloomberg.net

Last Updated: October 20, 2008 09:22 EDT