Sweden a Crisis Casualty No More Shows How to Get Haven GlowJohan Carlstrom
After suffering through devaluations, three years of economic contraction and a banking crisis in the 1990s, Sweden has learned how to handle financial turmoil.
Now, the largest Nordic economy is emerging as a permanent haven from global market turbulence, according to the nation’s debt office.
“Sweden is looked at in a different light than before,” Thomas Olofsson, head of the Swedish government’s debt management, said in an interview in Stockholm. “There’s definitely a completely different interest in Sweden than five to 10 years ago. In the past, the Swedish exchange rate and interest rates often suffered during times of turbulence in a way that we haven’t seen this time around.”
The country cemented its status as a haven from Europe’s debt crisis last year, after posting the biggest economic rebound in the European Union in 2010 while keeping its budgets in surplus. Sweden boasts the lowest default risk in the world, after oil-rich Norway, credit derivatives suggest, and has managed to produce some of Europe’s best-capitalized banks.
The success in navigating way through the current crisis follows lessons learned two decades ago. Swedes suffered three years of economic decline from 1991 through 1993, culminating in the 1992 currency crisis, when the Riksbank abandoned the krona peg after failing to stem capital flight even with a 500 percent interest rate.
After those experiences, Sweden put in place the fiscal and regulatory framework to shield the economy from financial instability. The measures proved robust enough to withstand even the worst global economic crisis since the Great Depression.
Crisis policies following Sweden’s 1990s economic shock included setting budget surplus targets and longer-term spending ceilings.
Now, the krona is the second-best developed-world currency, gaining 5.9 percent on a correlation-weighted basis over the past 12 months. That’s second to only the New Zealand dollar in a basket of 10 developed nations tracked by Bloomberg. Sweden’s krona has gained about 36 percent against the euro and 41 percent against the dollar since March 2009.
“A big difference from the past is that the krona has been so strong during this cycle of weak economic activity,” Jussi Hiljanen, head of fixed income research at SEB AB in Stockholm, said by phone. “Typically, things haven’t been like that.”
The country’s 10-year government bond yields just over 40 basis points more than benchmark German notes, compared with an average of 87 basis points over the past 23 years. At the height of the debt crisis last year, Swedish 10-year yields even sank as low as 22 basis points below bunds.
The difference in yield between benchmark Swedish 10-year debt and similar-maturity German bunds narrowed three basis points as of 9:11 a.m. local time to 42 basis points. Sweden’s 10-year yield eased two basis points to 1.67 percent. Two-year yields also fell two basis points, narrowing the spread on that maturity relative to bunds to 79 basis points from 82 basis points at the end of last week.
Though spreads widened earlier this year amid confidence euro-area policy makers will be able to contain the region’s crisis, there are signs investors have started to view the move as a buying opportunity.
“Investors probably think our bonds have become quite cheap and that it’s attractive to buy them again,” Olofsson said. “We’ve seen that interest from international investors has returned. They’re very interested in our bond market, not the least the government bond market because of its liquidity and Sweden’s AAA rating.”
Olofsson declined to give any prediction as to where Swedish yields might move.
According to Hiljanen at SEB, “bond spreads still have the potential to tighten further.”
Foreign investors increased their ownership of Swedish public debt to 45 percent in February from 31 percent following the collapse of Lehman Brothers Holdings Inc. at the end of 2008, according to SEB calculations. In July 2000, foreign investors held only 16 percent of Swedish debt.
“They’re buying Swedish bonds not just because of our sound public finances but also because it’s a different currency” from dollars and euros, Olofsson said. “They have, of course, seen that these types of concentrated assets come with a risk that they haven’t taken into account before.”
Finance Minister Anders Borg has cut debt levels to below 40 percent of gross domestic product since taking office in 2006 and kept the budget close to balance throughout the financial crisis. That has allowed Sweden to boost spending to foster growth this year, as the austerity-mired euro area contracts for a second year.
The EU last week estimated the Swedish economy, home to Ericsson AB and Hennes & Mauritz AB, will grow 1.5 percent this year and 2.5 percent next year. The 17-nation euro area will shrink 0.4 percent this year, the European Commission said on May 4.
Sweden’s AAA rated debt will reach 40.7 percent of GDP this year, compared with 38.2 percent in 2012, the European Commission said last week. That’s well within the European Union’s 60 percent threshold and compares with an average of 95.5 percent in the euro area.
Sweden’s central bank last month said there is “still considerable uncertainty” in the euro area where growth is “expected to remain weak.” It signaled Sweden’s benchmark repo rate will probably remain at 1 percent until the second half of next year, before tightening can start. The European Central Bank on May 2 cut its key rate to 0.5 percent to help pull the euro area out of a recession.
“The Riksbank has a somewhat higher policy rate than the ECB which together with better liquidity suggests that we will have to sell our bonds at a higher rate than Germany,” Olofsson said. “We have on the other hand significantly stronger public finances than Germany, and are not burdened with the uncertainty in the eurozone.”