Fleeing Negative Rates Swedes Are Finding Haven With Taxman

  • Agency to reduce borrowing in bills and foreign currency
  • Keeps borrowing volume in bonds, inflation-linked debt

The Swedish central bank’s decision to drive interest rates deep below zero is having some unintended consequences for Swedish public finances as people are turning to the taxman to park their cash.

This development on Wednesday prompted the Swedish Debt Office to predict the government this year will post an unexpected budget surplus of 3 billion kronor ($350 million) even amid rising costs to deal with a record inflow of refugees. Just this October, the office had predicted a 33 billion kronor deficit for 2016.

Households and companies have deposited about 22 billion kronor in tax accounts, which pay a higher interest on surplus payments than offered by accounts at commercial banks. The government is now looking to eliminate the interest on accounts at the tax office, the Finance Ministry said on Wednesday.

“The Tax Agency can be described as some form of parallel debt office here, which is paying for borrowing whereas we’re paid to borrow,” said Hans Lindblad, director-general at the debt office, at a press conference. “That’s unfortunate.”

The debt office said that tax accounts are being used to place “liquid funds” and many are even requesting that return payments are blocked to avoid excess money in tax accounts from being repaid out automatically.

Minutes from the Swedish central bank’s policy meeting this month showed more board members are becoming concerned about the negative effects of low rates even as they lowered the main lending rate to a record minus 0.5 percent.

Governor Stefan Ingves on Tuesday downplayed any negative effects on commercial banks since it would only shave off about 1 billion kronor from their combined 100 billion kronor in profits. According to the debt office, the cost for tax payers could amount to about 200 million kronor.

Despite the lower borrowing requirement, the agency kept its forecast for planned government bond issuanceat 88 billion kronor a year in 2016 and 2017. Inflation-linked borrowing is also unchanged and bond auction volumes will stay at 4 billion kronor. Instead, the debt office will cut Treasury bills and foreign-currency bond issuance.

According to Lindblad, maintaining liquidity was behind the decision not to cut issuance of nominal and inflation-linked bonds.

The Riksbank, which sits on about 22 percent of all nominal government bonds, plans to buy about a third of those assets by the end of June. Last week, it also flagged for the possibility to expand asset purchases to inflation-linked bonds as its seeks to add stimulus and revive inflation, which hasn’t met its 2 percent target in five years.

Swedish bond spreads ballooned in December amid concern finances were being overwhelmed by a record inflow of refugees. The country, which has seen more asylum seekers per capita than any other European Union nation, has since erected border controls and said it may reject half the 160,000 people that arrived last year.

The spread or difference in yield between Swedish 10-year and Germany 10-year bonds ballooned to 50 basis points in December. It has since narrowed to about 33 basis points.

While the next two years look good for government finances, they could deteriorate beyond that given the costs to integrate immigrants and increasing pressure to spend more on welfare, education and an aging population, according to Daniel Bergvall, an analyst at SEB AB.

“It looks like we will have a few good years, in terms of public finances, but there may be question marks a bit further down the road,” he said.

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