Sweden’s debt office backed a central bank proposal that it issue 100 billion kronor ($15 billion) in debt to boost currency reserves while faulting the framework that allows for the jump in government debt.
The Riksbank last month requested that the agency borrow to increase the reserve to improve the financial system’s resistance to potential shocks from an “uncertain situation abroad” and banks’ “extensive funding in foreign currencies.” The central bank also cited Sweden’s rising commitments to the International Monetary Fund.
While backing the plan, “it’s wrong that a decision by a public authority can increase the government debt by three digit billion amounts without a clear framework,” the debt agency said today in a statement. “This decision-making undermines the parliament’s control over the government finances.”
The agency said that its “on-lending” to the Riksbank will be 200 billion kronor, or 5 percent of gross domestic product. The budget deficit for 2013 will rise to 156 billion kronor from 56 billion kronor and reported debt will increase by the same amount, the agency said.
“Current rules provide that the National Debt Office shall approve requests by the Riksbank as long as new lending to the Riksbank does not affect Sweden’s ability to finance other central government expenditures,” the agency said. “Strong government finances mean that no such conflict exists.”
Two of the central banks’ six board members opposed the plan, arguing that the debt office instead should restore reserves only once funds are used, which would cut the costs for taxpayers for banks’ “risky borrowing.”
“A regime where the National Debt Office borrows foreign exchange only once the Riksbank has needed to use the foreign exchange reserve is a more secure and cheaper solution to the government on the whole, than one where funds are locked in the foreign exchange reserve in advance,” the agency said. The office “looks forward to the review of rules which a government investigation will submit at the end of January,” it said.
The agency said it will issue bonds and “short-term securities” to raise the new amount for the central bank.
Swedish Finance Minister Anders Borg, who is pushing through stricter capital requirements for Sweden’s biggest banks than those set elsewhere, said Nov. 27 the government may limit bank borrowing in foreign currencies by possibly “introducing a fee or levy to make it more costly for the banks to expose Sweden to that kind of risk.” The threat followed warnings from Sweden’s Financial Supervisory Authority that banks are overly reliant on short-term funds in foreign currencies.
Sweden’s foreign currency reserve amounted to 270 billion kronor at the end of July, of which about 90 billion kronor was borrowed from the debt office. Including the gold reserve, assets amounted to 314 billion kronor. Boosting reserves by 100 billion kronor would cost taxpayers about 200 million kronor per year, the Riksbank estimated last month.