Swedish Krona Threat Is Upgraded as Borg Warns of Franc Syndrome

Sweden’s krona was poised for its worst week since September 2011 as policy makers backtracked on earlier signals they’re happy with the currency’s appreciation.

The krona lost 2.1 percent against the euro in the week through today -- its biggest weekly decline since Sept. 23, 2011. Finance Minister Anders Borg signaled yesterday his government is concerned the krona’s appreciation will hamper growth in the largest Nordic economy.

“It’s not very likely that the currency would stay weak,” Borg said in Washington. “It’s more likely that we would get the opposite problem, the Israeli and Chilean, South Korean, Switzerland problem, that you have a currency that becomes overvalued. That’s quite problematic for an export-oriented country like Sweden with a strong manufacturing industry.”

The krona has gained 5.8 percent, on a correlation-weighted basis, over the past 12 months. That’s more than any other currency in the basket of 10 developed nations tracked by Bloomberg, except the New Zealand dollar.

Swedish policy makers, who earlier this year dismissed export industry calls urging measures to weaken the krona, are now acknowledging the exchange rate is taking its toll. Riksbank Governor Stefan Ingves, who in February said he’s “happy” with the krona’s strength, this week pushed back the timing of monetary tightening until the second half of 2014 after blaming the krona for helping to keep inflation below target.

Forecast Cut

Borg earlier this week cut his 2014 economic forecast by 0.8 percentage point to 2.2 percent, citing the krona’s impact on exports and the labor market.

The krona sank as much as 1.3 percent against the euro on April 17, when Ingves revealed his delayed tightening plans. That followed a 0.5 percent decline against the euro on April 15, when Borg cut his economic forecast.

Estimates of the krona’s relative value vary. It’s 22 percent overvalued versus the euro this year, topping both the New Zealand and Canadian dollars, according to calculations from the Organization for Economic Cooperation and Development.

Other measures show the krona is still cheap. The Sweden Purchasing Power Parity Exchange Rate CPI index suggests the krona is 23 percent undervalued, relative to average values between 1982 and 2000.

Borg said yesterday Sweden’s private sector is more reliant on currency developments than Switzerland’s, given its focus on heavy industry.


“We are not Switzerland, we are not in pharmaceuticals and banks,” he said. “We are in paper, pulp, trucks, high techs, drilling rigs, oil construction. We are basically kind of a mini-Germany in terms of manufacturing products. So for us to have a development where the exchange rate is slipping away could be quite problematic.”

Sweden, which generates half its economic output from exports, of which 70 percent are destined for Europe, will lose more jobs next year as a result of weak demand in the euro area, Borg said this week. Unemployment will rise to 8.4 percent in 2014 from 8.3 percent, his ministry estimates. That’s the highest rate in Scandinavia.

The AAA rated nation emerged as a haven from Europe’s debt crisis last year, only to watch its currency appreciate more than most of its developed-world peers. The currency’s strength is even hurting Sweden’s public finances.

Sluggish economic growth means the government of Prime Minister Fredrik Reinfeldt will post a budget deficit in both 2013 and 2014, Borg said April 15. The shortfall will reach 1.6 percent of GDP this year and narrow to 1 percent in 2014. Sweden’s budget will be in balance in 2015, he said.

“It’s very difficult to see how the krona would do something else than gradually and slowly appreciate beginning in the years to come,” Borg said in Washington. “For us, that would be a drag on growth I think.”

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