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Sweden Raises Borrowing as Recession Looms Amid Job Cuts

Sweden raised its estimate for the government’s borrowing need in 2012 as the largest Nordic economy struggles to avert a recession amid growing unemployment.

The National Debt Office increased its estimate for sales of nominal bonds this year to 50 billion kronor ($7.5 billion) from the 35 billion kronor predicted in October, according to a statement published today in Stockholm. The agency said it expects to issue 53 billion kronor in nominal bonds in 2013, 20 billion kronor more than estimated in October.

“We have seen a big drop in demand for Swedish exports, and this uncertainty, primarily in Europe, has prompted Swedish households to be careful, save more and consume less,” said Haakan Carlsson, a senior analyst at the debt office at a press conference in Stockholm.

Sweden’s economy shrank 1.1 percent in the fourth quarter, its first contraction since 2009, as the European debt crisis weighed on exports and companies cut jobs. Unemployment will average 7.7 percent this year, up from 7.5 percent last year, the central bank predicted last month as it cut interest rates for a second consecutive meeting.

Deficit Call

The agency cut its forecast for government finances to an 11 billion-krona deficit this year from a 25 billion krona surplus in October and to a 3 billion kronor surplus from a 29 surplus next year. Total gross central government borrowing will be 33 billion kronor higher this year than previously forecast at 291 billion kronor and 27 billion higher at 238 billion kronor in 2013, the debt office said.

The spread, or difference in yield, between Sweden’s 10-year note and the equivalent German bund widened three basis points to five basis points as of 12:34 p.m. in Stockholm. Sweden’s note last year yielded as much as 64 basis points less.

“If one looks at nominal government bonds, the 10-year bond will still be prioritized,” said Eric Morell, a senior analyst at the debt office at the press conference.

About half of the increased borrowing will come from nominal government debt issues. The debt office plans to maintain the issue volume at 2.5 billion kronor per auction, choosing instead to increase the number of auctions.

Bill Sales

Funding in Treasury bills will “be greater” and borrowing in foreign currency will “increase somewhat, due to our funding a larger part of on-lending to the Riksbank on the bond market,” the debt office said.

“The report is largely as expected and confirms that the weaker growth is easing the squeeze on Swedish bond supply seen in 2011,” said Olle Holmgren, an analyst at SEB AB in Stockholm, in a client note. “Still, gross bond issuance remains well below the average over the last 10 years.”

Sweden’s total central government debt will fall to 32.8 percent this year and 32 percent in 2013 from 33.3 percent last year, the debt office predicted, even as other nations in Europe struggle with rising debt levels.

Sweden had reduced its debt after the economy expanded at the fastest pace in 40 years in 2010, attracting demand for its AAA rated bonds as investors fled the euro area.

Sweden’s bonds maturing in more than 10 years were last year the best performing bonds among major indexes tracked by Bloomberg, returning 31 percent in local currency, according to Bloomberg/EFFA sovereign indexes. U.S. debt maturing in 10 years or more returned 29 percent, the index showed.

This year, Swedish bonds with a maturity of 10 years or more have slid 2.8 percent. Sweden’s 10-year note yields three basis points more than its benchmark German counterpart, after last year yielding as much as 64 basis points less. The spread widened one basis point today.

The agency predicted economic growth of “just under” 1 percent this year and “just under” 3 percent next year. Growth was 3.9 percent in 2011. Unemployment will rise “gradually, this year to an average 7.8 percent before reaching 8 percent in 2013, the debt office predicted.

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