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Sweden Debt Market Tensions Show ECB What Exit Brings

The European Central Bank need only look north to Sweden to see what may happen when it begins to withdraw liquidity.

Since the Swedish Riksbank became the world’s first central bank to end emergency loans just over a month ago, short-term interest rates have soared to the highest levels since January. The withdrawal of 300 billion kronor ($46 billion) of crisis loans has also sparked a selloff in the country’s mortgage debt market, which is twice the size of its government bond market. The difference between mortgage rates and swaps last month rose to the widest since March, as Sweden’s covered-debt market slumped.