Sweden
2009 Article IV Consultation: Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Sweden

This 2009 Article IV Consultation highlights that Sweden has been hit hard by the global financial crisis. Two of its banks built up large exposures in the Baltics that significantly increased loan losses beyond normal recessionary levels. In response to the crisis, the authorities have taken wide-ranging measures to stabilize the financial system and support demand. Executive Directors have welcomed the authorities’ prompt and appropriate policy responses, which have allayed immediate concerns with financial sector stability, and have helped cushion domestic demand.

Abstract

This 2009 Article IV Consultation highlights that Sweden has been hit hard by the global financial crisis. Two of its banks built up large exposures in the Baltics that significantly increased loan losses beyond normal recessionary levels. In response to the crisis, the authorities have taken wide-ranging measures to stabilize the financial system and support demand. Executive Directors have welcomed the authorities’ prompt and appropriate policy responses, which have allayed immediate concerns with financial sector stability, and have helped cushion domestic demand.

I. Summary and Appraisal

Up to the Spring of 2008, the Swedish economy boomed

1. Since 2002, Sweden thrived in buoyant global conditions, reflecting strong policies and a composition of output—investment goods and consumer durables—particularly favored by the boom.

2. But the same worldwide factors which supported this record also left Sweden highly exposed to the post Fall-2007 financial crisis. Its investment goods and consumer durables exports were hurt by weakening external demand long before the major contraction in global trade late in 2008. And as the international financial wholesale markets closed and investor concerns with Baltic exposures mounted, liquidity crunched. Having surfed the earlier global wave, Sweden has been hit hard by its crash.

Policy action has steadied confidence, but the tide is still out

3. The authorities’ response was prompt and appropriate, and immediate concerns with financial sector stability have been addressed. The full range of measures typical elsewhere was implemented, incorporating the agreed European Union (EU) response, including on the fiscal side, full operation of automatic stabilizers and a discretionary budget loosening for 2009—taking the budget from a surplus of 2½ percent of GDP in 2008, to a deficit of 4 percent in 2009. Much has been done.

4. Immediate prospects for recovery are at the mercy of developments abroad. As a producer of goods disproportionately favored by the prior global boom, Sweden was one of the first into the downturn. And if demand for those goods recovers slowly relative to other components of global demand—as seems likely given large output gaps, credit constraints, and wait-and-see behavior by investors and consumers abroad—Sweden could be one of the last out. Accordingly, with GDP already declining slightly through 2008, staff project it to fall by 6 percent in 2009 with recovery firmly taking hold only from the middle of 2010. In this context, unemployment will rise significantly.

Policy for 2009–10 should continue to aim to minimize the fall

5. The ongoing integrated policy response could be strengthened in various ways, to further boost Sweden’s resilience in this testing environment, while maintaining confidence.

Large fiscal stabilizers should continue to operate, along with the stimulus underway

6. However, the case for additional discretionary fiscal activism to offset the downturn is not persuasive at this juncture. The scale of the fiscal action underway—as measured by the change in the general government headline balance—is, on staff projections, already one of the largest in the EU. Furthermore, plausible estimates of potential output yield widely varying estimates of the structural balance and the fiscal outlook, and it is unclear how much public debt will rise due to financial sector rescue operations that may prove to be necessary. In addition, the stabilizers are large, the multipliers are small, and with estimates of medium-term potential output growth being lowered globally, the long run fiscal strength, apparent at the outset of the crisis, will need to be thoroughly reassessed when the waters settle.

7. Accordingly, the scale of the shift in the structural fiscal balance projected by staff—a weakening of 2¼ percentage points of GDP in 2009, and a further ¼ percentage point in 2010—goes as far as is appropriate in providing a decisive fiscal response to a uniquely sharp fall in demand, without compromising sustainability. The composition of the discretionary component of the shift focuses on tax reductions, aiding supply side efficiencies even though their immediate demand impact is likely limited.

8. On the fiscal side, the key strengthening suggested concerns operation of the fiscal rules. The target of a surplus of 1 percent of GDP over the cycle should remain, as should the firm commitment to the nominal spending ceilings, because these support fiscal sustainability. But a new commitment to adjust the spending ceilings to offset the net revenue impact of any further discretionary tax reforms on projected budget balances would strengthen medium-term sustainability further.

Monetary policy is appropriate

9. On the monetary side, a modest undershoot of the inflation target—1 to 3 percent—is likely this year. However, risks of sustained disinflation appear low: in particular, short and long term indicators of inflation expectations point this way. Only if inflation is expected to fall significantly and on a sustained basis, should consideration be given to further action.

10. The exchange rate is probably modestly undervalued. Given the particular exposure of Sweden to the global collapse in demand for investment and durable consumer goods, a good part of the recent depreciation is likely an equilibrating adjustment. Accordingly, along with the reforms to labor market structures and income taxation in recent years, it will play a key role in containing increases in unemployment and the accompanying concerns with hysterisis.

Additional proactivity may strengthen the financial sector further

11. Financial sector fragilities reflect Baltic exposures, recession, and banks’ reliance for funding from global wholesale markets.

12. These fragilities have been assessed in thorough stress tests, indicating that banks will meet regulatory minimum requirements even in highly adverse contexts. But market concerns about the adequacy of Swedish banks’ capital remain, indicating, as internationally, that more remains to be done, notwithstanding the extraordinary stability support measures that are in place.

13. Further steps to strengthen the resilience of the banks, including by boosting capital, when needed, and developing contingency planning, are warranted as soon as possible. Such steps would boost resilience to short term shocks, reduce risks to credit supply and to taxpayers, and enhance an early exit from the extraordinary support measures.

14. Where specific banks appear to be at risk, enhanced supervision and (if needed) rights issues should be considered. If such steps prove insufficient, then public equity—injected at prices appropriate to ensure protection of taxpayer interests—and implementation of a bad-bank model are further options.

15. Alongside, continued broader contingency planning by the authorities is also appropriate, including further review of the toolkit for supervisory intervention to ensure robustness. There is also scope for further increases in international reserves beyond those already announced.

16. Beyond this, the institutional capacity of the Financial Supervisory Agency should be boosted. Given sizable international operations of large Swedish banks, further concerted efforts to strengthen cross-border crisis resolution mechanisms, coordinated with EU partners, should also be made.

17. Sweden should remain on the standard 12–month consultation cycle.

II. The Context—2004-08 1

In buoyant global conditions, Sweden thrived (Figures 1 and 2)

Figure 1.
Figure 1.

Sweden: The Long View, 1996–2008

Citation: IMF Staff Country Reports 2009, 247; 10.5089/9781451836035.002.A001

Sources: Haver Analytics, Konjunkturinstitutet, Statistics Sweden, and IMF staff calculations.1/ In thousands.
Figure 2.
Figure 2.

Sweden: The Recent Boom. 2001–07

Citation: IMF Staff Country Reports 2009, 247; 10.5089/9781451836035.002.A001

Sources: Eurostat, Haver, Statistics Sweden, and IMF staff calculations.

18. Activity rebounded strongly after 2001–03, led initially by a turn-around in exports and the associated boost to investment. Income flows from earlier foreign investments by Swedish banks and corporates provided an additional boost. In this context, domestic factor markets tightened, which, alongside positive wealth effects from the associated booms in stock and house prices, buoyed private consumption. Household debt rose sharply, and import growth caught up with, and eventually outpaced export growth.

This has reflected and supported strong policies

19. As noted by the authorities, in the context of high household savings rates, countercyclical policies helped restrain demand (Figure 3; ¶60). Automatic stabilizers are large and discretionary fiscal policy is tightly constrained by rules on the overall balance and on expenditure (Box 1). This framework has produced strong fiscal outcomes (Table 8). Inflation remained within the 1–3 percent target band bar mid-2008 when global food and oil price developments caused a temporary surge. These policies were consistent with past staff advice (Box 2).

Figure 3.
Figure 3.

Sweden--Fiscal Policies are Sound, 1993–2008

Citation: IMF Staff Country Reports 2009, 247; 10.5089/9781451836035.002.A001

Sources: Ministry of Finance, Eurostat, and IMF staff calculations.

Sweden’s Fiscal Rules

The main fiscal target is to achieve a general government surplus of 1 percent of GDP over the business cycle. This is supported by expenditure ceilings (rolling three-years ahead) for central government and social security outlays (excluding interest), and the balanced-budget requirement for local governments. The authorities use three indicators to assess performance against the surplus target (See Text Figure). The framework aims for flexibility over the cycle while responding to demographic trends, thus ensuring long-term sustainability of the public finances and intergenerational fairness.

uA01fig01

Compliance with the Fiscal Target

(Percent of GDP)

Citation: IMF Staff Country Reports 2009, 247; 10.5089/9781451836035.002.A001

Source: Spring Bill 2009.

Implementation of IMF Recommendations

Fiscal policy and framework. Consistent with IMF recommendations, the authorities have maintained adherence to their fiscal rules.

Monetary policy: Following Fund recommendations, prior to fall 2008, the Riksbank maintained a tightening bias to anchor inflation expectations—which remained above the upper bound of inflation target. Since October, the monetary policy stance has been accommodative to keep inflation expectations from falling below the lower band of inflation target.

Financial sector: IMF calls for a dedicated bank resolution framework have recently been implemented, but a clear PCA type framework is required, more rapid Deposit Insurance payout arrangements, and additional resourcing of the FSA remain outstanding.

20. Bank profitability grew rapidly between 2002–07, reflecting domestic and foreign lending, including in the Baltics. Overall capital adequacy was around 10½ percent, while Tier 1 capital adequacy was around 7 percent, with loan losses remaining low.

But strong growth has also reflected the composition of Sweden’s output (Text Table)

21. Sweden’s output bundle is dominated by investment-related and durable consumption goods—computers, industrial machine tools, electrical equipment, and chemicals—and increasingly, business services. These goods disproportionately benefited from the global boom after 2002. This accounts, in part, for rapid export growth to European emerging markets, oil exporters, and to booming Nordic economies.

Sweden: Key Export Sectors, 1990–present

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Sources: Eurostat, Statistics Sweden; and IMF staff calculations.

22. Alongside, Baltic entry into the EU in 2004 heralded a period of rapid growth in Swedish banks’ asset acquisition there—largely funded on buoyant international capital markets. This generated high income reflows and strong performance of the associated banks’ stock prices (Figure 4).

Figure 4.
Figure 4.

Sweden: Increasing Openness Over the Boom, 2000–08

Citation: IMF Staff Country Reports 2009, 247; 10.5089/9781451836035.002.A001

Sources: Statistics Sweden; and IMF staff calculations.1/ Sum of exports and imports as a percent of GDP.

Sweden: Geographical Composition of Exports, 1995–present

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Sources: Direction of Trade Statistics; and IMF staff calculations.

Notes: Excluding the Baltic countries (Estonia, Latvia, and Lithuania).

Competitiveness remains firm (Box 3, Figure 5)

Figure 5.
Figure 5.

Sweden: External Competitiveness Remains Firm, 1996–2008

Citation: IMF Staff Country Reports 2009, 247; 10.5089/9781451836035.002.A001

Sources: International Finance Statistics, Konjunkturinstitutet, Statistics Sweden, and IMF staff calculations.

Competitiveness and the Equilibrium Real Exchange Rate

Last year, staff analysis suggested considerable Krona undervaluation. (Text Table).

Previous CGER Estimates

article image
Source: CGER.

Since then, notably since the Fall of 2008, the Krona has depreciated considerably. However, staff concerns have not increased; indeed, we are rather less concerned than we were. This reflects revisions to staff projections for exports and investment returns. In particular, staff no longer assume that the strength of Sweden’s exports and strong factor income in recent years was permanent. Rather, both, in hindsight, appear to have reflected temporary surges, the first reflecting the composition of global demand during a bubble—the 2009 Spring WEO projects growth of fixed investment in coming years to significantly lag domestic demand in the US and Euro areas, in contrast to earlier in the decade—and the second reflecting unsustainable returns from bank investments in the Baltics. With durables, investment-input, and investment exports constituting well over half of total exports, a reduction in their earlier-estimated trend growth rate by 1/3 lowers total exports by some 1¼ percentage points of GDP by 2014. And the revised outlook for the Baltic states may lower investment returns by some 3 percentage points of GDP over the medium term.

Following these revisions, estimates as of May 2009 were as follows (Text Table). The reported range is large and all the measures are subject to uncertainty. However, the External Sustainability estimate may overstate the equilibrium exchange rate because the ongoing ageing of the population calls for a strengthening rather than a stabilization of the net external position in the medium-term. The appreciation implied by the RER estimate would be inconsistent with this. And the macro balance estimate is much smaller. Accordingly, alongside other indicators, notably the moderate level of inflation expectations, plummeting exports (like elsewhere), and the similar goods competitiveness as was realized during the last global downturn, the staff assessment, despite Krona depreciation since Q4 2008, is that the currency is probably not very significantly undervalued.

Current CGER Estimates

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Source: CGER.

By 2008, however, Sweden was highly exposed to external shocks

23. The global factors supporting the recent boom also increased vulnerability to the subsequent international recession. Swedish exports felt the impact as early as Q2 2008, with a significant acceleration in the decline as elsewhere in Q4 2008 (Figure 6). In addition, credit growth began to fall, both to households and corporates, albeit gently, with few signs, even in the April 2009 lending conditions survey, of rationing.

Figure 6.
Figure 6.

Sweden: Into the Downturn, 2007-09

Citation: IMF Staff Country Reports 2009, 247; 10.5089/9781451836035.002.A001

Sources: Haver, Statistics Sweden, and IMF staff calculations.1/ OMX Stockholm Price Index (1995=100); bond yield and STIBOR in percentage points.

24. Meanwhile, weaker consumer confidence—reflecting tumbling equity values, rising borrowing costs, and later, by falling employment—was reflected in greater precautionary saving through all of 2008, and consumption fell. Subsequently, investment—already bruised by falling exports and the global outlook—also fell starting Q2 2008. Output fell throughout H2 2008.

Overt banking and financial sector strains also emerged

25. Banks’ profitability fell sharply in 2008–09 despite negligible exposure to US subprime—or other structured—assets (Figures 7 and 8). Two of the largest banks, both increasingly funded on wholesale markets and exposed to the Baltics, both saw sharp increases in loan losses with their share prices and ratings marked down accordingly. Money market spreads—though lower than elsewhere—tightened sharply in Q4 2008 and have yet to return to pre-crisis levels. The stock market dropped nearly 40 percent in 2008, recovering somewhat recently, and spreads of mortgage bonds over government bonds rose to unprecedented highs. Alongside, solvency ratios of insurers fell (Figure 9).

Figure 7.
Figure 7.

Sweden: Selected Financial Indicators, 2005–09

Citation: IMF Staff Country Reports 2009, 247; 10.5089/9781451836035.002.A001

Sources: Thomson Financial/Datastream, Bloomberg, and Haver.
Figure 8.
Figure 8.

Performance of the Swedish Banking System, 2007–09

Citation: IMF Staff Country Reports 2009, 247; 10.5089/9781451836035.002.A001

Source: Thomson Financial/Data Stream, Bloomberg, Banks’ Annual Reprots, and WEO.
Figure 9.
Figure 9.

Sweden: Non Bank Financial Sector, 1990–2008

Citation: IMF Staff Country Reports 2009, 247; 10.5089/9781451836035.002.A001

Sources: Riksbank, Statistics Sweden, and Haver.

Summary of the Performance and Operation of Swedish Four Major Banks

(In percent; unless otherwise indicated; end period)

article image
Sources: Banks’ annual reports; and IMF staff estimates.

With Basel II transition rule.

For Nordea and Handelsbanken, excludes loans to credit institutions; for SEB, includes all credit portfolios (such as commitment and guarantees); and for Swedbank, includes credit institutions.

Monetary and Financial Sector Stability policies adjusted decisively

26. Until September 2008, the Riksbank had maintained a tightening bias but the stance has since switched to accommodating, as the severity of the deflationary impact arising from the global financial crisis was increasingly recognized (Figure 10). The policy rate has been cut by 425 basis points to ½ percent. Against this background, the freely floating Krona depreciated significantly. The authorities have also taken a wide range of measures to stabilize financial markets (Box 4).

Figure 10.
Figure 10.

Monetary policy, 2003–09

Citation: IMF Staff Country Reports 2009, 247; 10.5089/9781451836035.002.A001

Sources: Thomson Financial/Datastream, Bloomberg, Haver, and Riksbank.

And weaker activity was quickly reflected in budget revenue

27. Against this backdrop, a shortfall in revenue lowered the general government fiscal surplus from 3.8 percent of GDP in 2007 to 2½ percent of GDP in 2008. While expenditure rose broadly in line with a planned increase of 4 percent, revenue rose just 1.6 percent (compared with the budget-envisaged 4.1 percent). In addition to automatic stabilizers, the significant decline in asset prices notably in stock market indices following the global financial crisis took their toll on corporate income and capital income tax that had been particularly buoyant in recent years. Excluding the cyclical and one-off factors, however, given a small opening of the output gap, the structural balance is estimated to have improved slightly in 2008 to about 2½ percent of GDP. Public debt stood at 38 percent of GDP at end-2008.

And discretionary policies will weaken fiscal outturns further in 2009

28. With automatic stabilizers at full play together with fiscal measures, a large fiscal stimulus—6.6 percentage points of GDP deterioration in the headline budget balance—is expected.

Actions Taken to Stabilize the Financial Sector

Measures to increase Krona liquidity
  • Since October 2008, the repo rate was cut by 425 basis points to ½ percent.

  • The Riksbank started fully accepting covered bonds and lowered the minimum credit rating requirements for long-term securities pledged as collateral.

  • The Riksbank set up new 3, 6, and 12-month loan facilities to facilitate banks’ access to longer-term funds.

  • The Riksbank established a new temporary credit facility using commercial paper as collateral (with a maturity of up to one year) to facilitate the supply of credit for non-financial companies.

  • The National Debt Office issued treasury bills and invested the funds raised in covered bonds to boost covered (mortgage) bond market.

  • The Riksbank granted emergency liquidity assistance facilities to Kaupthing Bank Sverige AB and Carnegie Investment Bank AB (both SEK 5 billion). Later, Kaupthing Bank was liquidated, while the licensing of Carnegie Investment Bank BA was revoked.

Measures to increase foreign exchange liquidity
  • The Riksbank and U.S. Fed set up temporary reciprocal swap facilities ($30 billion). A separate swap facility was also established with the ECB.

  • New dollar term loan facilities (with the maturity of 28 and 84 days) have been offered.

  • The Riksbank began to restore the level of the foreign currency reserve funded by borrowing by the National Debt Office of equivalent SEK 100 billion.

Measures to support banks’ capital and assure market confidence
  • The government increased the deposit guarantee from SEK 250,000 to SEK 500,000, and extend the coverage to include all types of deposit in accounts (October 6, 2008).

  • In October 2008, the government approved a debt guarantee scheme for the medium-term borrowing of banks and mortgage institutions. The total amount of guarantee was set at SEK 1.5 trillion, of which a maximum of SEK 0.5 trillion would be used for covered bonds with the maturity of 3 months -5 years. An institution applying for the guarantee would pay fees and be subject to restrictions on remuneration for senior management. Two financial institutions have availed themselves of this guarantee scheme.

  • The bank recapitalization scheme is intended for banks and other credit institutions. The government’s capital takes the form of shares or hybrid capital (Tier 1 capital). Participating institutions are subject to restrictions on remuneration for senior management.

  • In October 2008, the government enacted “Government Support to Credit Institutions Act” which gives the National Debt Office power to take over a troubled bank if there is a serious systemic risk and bank capital falls below 25 percent of the regulatory requirement (¶67).

  • The government set up a stabilization fund to finance government measures to support the financial system (the sources of the funds are annual fees from banks and other credit institutions).

Staff has estimated the net expected cost of all these actions at 7.7 percent of Swedish GDP.

III. Outlook and Risks

External factors continue to weigh on near term prospects

29. Given output and exports dominated by capital goods and consumer durables, Sweden may be both an early and chronic victim of the global recession, if global demand for those goods recovers slowly relative to other components of global demand. This may be compounded by exposure to the Baltics, and the likely slow recovery of global wholesale markets on which Sweden’s banks have hitherto depended heavily.

30. Imports of Sweden’s trading partners grew on average over 8½ percent annually between 2004-07, by just 2½ percent in 2008, and are projected to fall 11 percent in 2009, recovering significantly only in 2011. Given strong US and Eurozone spillovers, this will weigh heavily on the Swedish outlook (Attachment I). Accordingly, income, unemployment, and confidence effects will depress private consumption growth through 2009—which is not expected to return to positive territory until early 2010, and only to make a fuller recovery well beyond that. This, and the outlook for exports, is expected to be reflected in a fall in investment through 2009, with recovery beginning in the second half of 2010. These developments will also be reflected in falling imports, shielding activity somewhat, though the trade balance will likely deteriorate in both 2009 and 2010.

31. Consequently, though the authorities were somewhat more optimistic, quarterly GDP will likely fall through 2009—with annual activity projected to shrink by 6 percent—before recovering sufficiently to yield a flat path in annual terms by end-2010 (Text Table; Table 2; ¶61). Recovery in the global economy post-2010 is anticipated to result in a quicker growth in exports and domestic demand beyond 2011, raising GDP growth up to 3¾-4½ percent during 2012-14. But on the external side, weakness in the Baltics is expected to permanently lower income flows relative to the recent past.

32. Headline annual CPI inflation will be considerably lower through 2009 reflecting weak demand, the impact of lower interest rates on housing costs, and global energy and food price developments, despite the impact on prices from the Krona depreciation. A gradual increase—corresponding to that in demand—is expected in 2010.

Sweden: Near-term Economic Projections; 2009–10

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Sources: Statistics Sweden; and IMF staff projections.

Various downside risks are associated with this outlook

  • Prolonged global financial market strains, even weaker-than-projected export markets, and worse Baltic outturns.

  • Weakening housing and property markets, along with rising unemployment, would decrease collateral values and the supply of credit-worthy borrowers.

  • Corporate financial positions are weakening. Since 2007, companies’ capacity to cover interest payments has deteriorated.

But these are mitigated by various factors

  • Global recovery could be faster than projected.

  • Stabilization efforts in Baltic countries could succeed, with stronger-than-projected activity, reducing associated uncertainties.

  • The significant fiscal and monetary relaxations, including via a significant depreciation, could cushion the projected downturn in 2009.

And the outlook for potential output is unclear

33. Recent Swedish global integration has raised growth and amplified the volatility of output. Correct identification of the trend and the cycle is key to projections of the near- and medium-term prospects (Box 5).

Prospects for Sweden’s potential output

Conventional approaches—HP filtering of real GDP or simple estimation of Solow residuals in Cobb-Douglas framework—may malfunction given the unique depth of the ongoing recession. In particular, application of the HP filter to the Cobb-Douglas production function does not capture the fall in trend capital accumulation and trend growth in total working hours that may accompany the current downturn—as they did during the early 1990s recession. Consequently, it assigns greater part of the volatility in real GDP to the cycle, and hence, potential GDP exhibits the least correlation with output over the last decade under this approach implying scope for a large recovery from the present downturn. At the opposite extreme, simple HP-filtering of the real GDP series may deliver an excessively volatile trend estimate.

To address these issues, two further exercises were conducted. First, the production function approach was modified to allow for a deterioration in trend capital accumulation and in trend growth in total working hours of magnitudes comparable to the early 1990s over the forecast horizon. These ad hoc adjustments likely provide a lower bound on trend growth in factor inputs, as reforms to labor market structures and income taxation in recent years is anticipated to limit labor market hysteresis relative to the 1990s.

Second, a trend line was fitted to the Solow residuals from a Cobb-Douglas decomposition of real Swedish GDP, and used to estimate potential output. The raw TFP estimates indicate various breaks: (i) in 1975, possibly reflecting the global oil shock; (ii) in 1995, possibly reflecting the banking crisis and associated institutional changes (e.g., floating currency, labor market reforms enhancing productivity); and (iii) in 2006, possibly an early sign of the unsustainable global boom then underway. So the linear representation of TFP trends, with turning points reflecting these 3 breaks, was constructed and the resulting series applied together with labor and capital inputs to obtain a trend GDP series (Figure 11).

Figure 11.
Figure 11.

Sweden: Potential Growth and the Cycle, 2000-14

Citation: IMF Staff Country Reports 2009, 247; 10.5089/9781451836035.002.A001

Sources: Eurostat, Haver, OECD, Statistics Sweden, and IMF staff calculations.

These exercises underscore the fragility of the standard—and indeed other—approaches to estimating potential output now. And even though most of them suggest medium-run potential growth in the region of 2 percent, the uncertainty surrounding all the measures suggests that this “average” is not a strong result. In the short term, both additional exercises described yield estimates of the output gap which lie between the extremes yielded by the standard methodologies. Finally, because the segmented time trend approach seems to best describe developments during the 1990s recession, that approach has been used as the baseline case.

IV. Implications for Policies and Policy Frameworks: 2009–10

34. Even with domestic policies well cast, prospects are gloomy for an early end to the recession that is underway. And any case for more stimulative countervailing domestic policies should carefully weigh risks that they may backfire and so compound the downturn.

35. In that context, the immediate priority is to ensure that the financial stability framework is ready to address downside tail risks should those materialize. Alongside, with the medium-term focus of fiscal policy remaining strongly credible, the operation of automatic stabilizers should proceed unimpeded. Furthermore, with inflation pressures abruptly diminished, support for activity from monetary action—both conventional and, if needed, unconventional—should remain aggressive. These steps will cushion the downturn, and buttress resilience to any additional shocks.

A. Financial Sector Policy and Framework

36. Challenges to financial sector stability derive from exposure to Baltic countries whose EU and Euro convergence aspirations have faltered, a severe Nordic (including domestic) economic recession, and banks’ reliance on global wholesale markets—now impaired—for their financing. All three interrelate, through market assessments of bank capital adequacy. And the framework for handling crises requires further strengthening (Boxes 6 and 7).

37. The authorities’ actions have addressed the immediate fallout from these strains (¶66). Official liquidity support has cushioned the loss of wholesale finance; the increase in bank deposit insurance limits has helped stabilize the deposit base; one domestic bank has been resolved; others have raised capital; and the authorities’ commitment to “do what is needed” has calmed both deposit and interbank markets. With the market still exposed to further possible shocks, including from abroad, as the authorities pointed out, that leaves the challenge of how and when to strengthen banks further, how to ensure that the flow of credit does not become a bottleneck to growth, and how to eventually exit from these extraordinary measures (¶67).

Recent stress tests follow best international practice

38. The most recent step addressing these challenges was publication of stress tests by the Riksbank and the FSA respectively. Both base case scenarios reflected 4½ percent GDP declines in 2009, and elevating credit losses in the Baltics, with probabilities of default and losses given default ratios based on past Swedish and international patterns. The stress scenarios both reflected expert adjustments to those ratios, consistent with assumed GDP contraction at twice the base case rate, along with impaired earnings. Under these assumptions, both sets of stress tests found that all banks observed the 4 percent Tier 1 capital requirement even in the stress scenario. The severity of the underlying assumptions used, the detailed institutional analysis, and the transparency and speed with which the results were reported all reflect best practice. But market concerns about the adequacy of Swedish banks’ resilience remain, as indicated by bank stock prices, CDS spreads, and the continued freeze in the interbank market, although financial prices have eased from their troughs of a few months ago, in the context of the stabilization of international financial markets.

This indicates, as elsewhere, that more needs to be done

39. Ultimately, banks’ business models, contingency plans, and capital ratios should all signal both institutional and market resilience, even in the absence of extraordinary stabilizing support. And significant steps towards such resilience would best be required over a relatively short time horizon. Early action—with due regard to costs—would reduce vulnerability to short term shocks, risks of curbed credit supply, contingent claims on taxpayers, and it would anticipate eventual exit from the extraordinary support measures.

40. As part of this, work should continue with all banks to ensure appropriate contingency plans. Enhanced supervisory scrutiny is the appropriate first response to institutions most at risk. Using Basel’s Pillar II approach, such banks could also be assigned a higher capital requirement, which they would be expected to meet over time including through new rights offerings and (as a bridge) via the government’s capitalization program. This approach would not be procyclical. Market concern with banks’ robustness constitutes the binding constraint on banks’ credit extension decisions now. Swift relief of that constraint, backed by public injection of equity where necessary, will boost credit prospects. The authorities are proceeding cautiously (¶67).

41. Such a strengthened preemptive strategy will require continued close cooperation of all the domestic and host countries authorities of foreign subsidiaries of Swedish banks. And to address risk that the strategy is overtaken by events, such as further bouts of investor uncertainty, contingency plans should be developed alongside in coordination with relevant regional authorities. With banks overtly stronger and contingency plans strengthened, resilience would be enhanced. Beyond this, the institutional capacity of the FSA should be boosted, including by prompt determination of strengthened arrangements for its ongoing resourcing, and it should expand its mandate to deposit-taking non-bank financial institutions.

42. The 2006 FATF assessment report suggested some weaknesses in Sweden’s AML/CFT framework. Among several measures to address such concerns, Sweden implemented the third EU Money Laundering Directive on March 15, 2009.

Is Sweden Ready to Manage Financial Instability?

Some elements of the financial stability framework could usefully be strengthened.
  • Bank resolution framework. In October 2008, the government enacted “Government Support to Credit Institutions Act” which gives the National Debt Office power to grant credit guarantees, and if there is a serious systemic risk and bank capital falls below 25 percent of the regulatory requirement, take over a troubled bank The effectiveness of this new scheme, including how and when to use intervention power, has yet to be demonstrated in practice (¶67).

  • A Prompt Corrective Action framework is needed, covering all banks and fully empowering the FSA to take the full range of supervisory corrective actions.

  • Supervisory capacity. The FSA has been constrained by high staff turnover, and it would benefit from greater funding, including to allow more thorough on-site inspections. Supervisory oversight over the leverage ratio and maturity mismatch could be strengthened.

  • Deposit insurance scheme. Under the current legal framework, deposit insurance funds can only be disbursed after a failed bank is placed into bankruptcy, which could be a lengthy process. Furthermore, the ability of the authorities to obtain relevant information about the balance sheet of a troubled bank at an early stage should be clarified.

  • Cross border coordination. There are major uncertainties in how a cross-border crisis would be resolved in a coordinated way. Memorandums of Understanding on crisis management were signed at the EU level and with three Baltic countries, but generally lack specifics and are not legally binding.

  • Emergency liquidity assistance (ELA). The design of the ELA framework is generally sound to deal with domestic liquidity problems. Nonetheless, how ELA would work for cross-border liquidity problems remain unclear.

  • Non-bank financial institution supervision. A number of non-bank financial institutions raise deposits, but they are not subject to FSA supervision nor reporting requirements.

How do the Baltic Subs Affect the Case to Support Swedish Banks?

Swedish banks’ exposures to the Baltic are extensive. SEB and Swedbank hold significant market shares there (40-80 percent in loan markets and 30-85 percent in deposit markets), and the authorities remain engaged with these activities (¶67).

Official financial cooperation between Sweden and the Baltics is considerable. In December 2006, the Riksbank signed a quadripartite Memorandum of Understanding with central banks of Estonia, Latvia, and Lithuania to set an agreement on cross-border cooperation in crisis management situations. In February 2009, with uncertainties about the external viability of Baltic countries heightened, the Riksbank entered into currency swap agreements with Latvia (the Riksbank to lend up to EUR 375 million) and Estonia (up to SEK 10 billion).

uA01fig02

SEB and Swedbank: Exposures to Baltic Countries (As Of End-2008)

Citation: IMF Staff Country Reports 2009, 247; 10.5089/9781451836035.002.A001

Sources: Banks’ annual reports; the authorities’ websites; and IMF staff Deposits estimates based on publicly-available information.1/ Deposits exclude non-residential deposits.

This reflects close Swedish-Baltic linkages:

  • Direct financial linkage. Swedish banks’ equity and loan claims on their Baltic subsidiaries at end 2008 represented 8 percent of Swedish GDP, while their loans to their subs amounts to 35-45 percent of bank capital. In addition, Swedish banks’ reliance on operating profits from Baltic operations is extensive (25 percent for Swedbank and nearly 10 percent for SEB). Accordingly, a deterioration in asset quality or profits in Baltic subsidies could present material risks to Swedish banks’ capital.

  • Possible contagion. Retreat from the Baltic subsidiaries could damage the franchise value of the parents, with possible contagion through the Swedish banking system, and the region.

  • Overall macroeconomic stability. A disorderly retreat from the subsidiaries could prompt broader loss of confidence in Sweden.

Given these considerations and the risks in the Baltics, a coordinated regional contingency plan is needed. It should address (i) the division of crisis management responsibility; (ii) methodology for evaluating bank asset quality and diagnosing the viability of institutions; (iii) restructuring policies; and (iv) burden sharing agreements addressing the respective liabilities of the home and host fiscal authorities. The last will need to be carefully considered—given various options that may be considered. A credible contingency plan would help stabilize confidence in the Baltic region and, by extension, in Sweden itself.

B. Fiscal Policy and Framework

The fiscal framework is strong

43. Sweden entered the downturn in robust fiscal health. Debt was low and falling, the framework of rules guiding policy has been consistently adhered to and the authorities have reiterated their commitment to it even in the context of the ongoing global shock. And not only is Sweden one of only a few countries to have completed a full long-term fiscal balance sheet exercise, but of those, it is one of very few to have strong results even under that most testing of examinations.

44. As the authorities underscore, that does not however establish the case for discretionary fiscal activism beyond that which is already planned (¶62). First, uncertainty over the level and path for potential output implies a substantial range of uncertainty around estimates of the structural balance now, and therefore the consistency of the current stance with the fiscal rule (See Box 8). Second, the fiscal stabilizers appear to be large and fiscal multipliers appear to be small, as suggested by the 2-country version of the IMF Global Integrated Monetary and Fiscal Model (See Text Table & Figure and Attachment III). Furthermore, it is unclear at this point how significant the public debt implications will be of any financial sector rescue operation, net of recoveries. And finally, the composition of any stimulus matters.

Budgetary Impact of a 1 Percent Change in GDP

(In percent of GDP)

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Source: OECD (2005), using 2003 weight.
uA01fig03

Multiplers in Sweden Using GIMF

Citation: IMF Staff Country Reports 2009, 247; 10.5089/9781451836035.002.A001

Source: IMF staff estimates.

45. Given the absolute size of automatic stabilizers and multipliers, the potential burden of the financial sector on public debt, and uncertainties about the structural balance, the scale of the authorities’ proposals for discretionary action in 2009-10 has merit. But it will strain efforts to remain compliant with the fiscal rule, and the composition of the discretionary stimulus raises some concerns.

Implications of Various Estimates of Potential Output for the Budget

The wide range of estimates for potential GDP and the output gap imply uncertainty in assessing the underlying fiscal stance—a range of nearly 3 percentage points of GDP for 2008—with associated widely varying implications about the space within the fiscal rule for discretionary stimulus. And trend output may be hit by further external shocks, with staff model-based estimates suggesting that such output volatility could reach ±1.1 percentage points of GDP a year.

uA01fig04

Sructural Fiscal Balance for Various Measures of the Output Gap

Citation: IMF Staff Country Reports 2009, 247; 10.5089/9781451836035.002.A001

Source: IMF Staff estimates.
uA01fig05

Fiscal Balance: Staff Scenarios

(Percent of GDP)

Citation: IMF Staff Country Reports 2009, 247; 10.5089/9781451836035.002.A001

The 2009 budget appropriately anticipates sizeable fiscal support for the economy

46. With automatic stabilizers at full play together with fiscal measures, Sweden is providing large fiscal stimulus to the economy—6.6 percentage points of GDP in 2009, on staff estimates, on of the largest in the EU (See Text Figure). However, even on the authorities’ more optimistic assumptions, the fiscal swings from a surplus of 2½ percent of GDP in 2008 to a deficit of 2¾ percent of GDP in 2009.

uA01fig06

Change in Fiscal Balance 2008-09

Citation: IMF Staff Country Reports 2009, 247; 10.5089/9781451836035.002.A001

Source: WEO Spring 2009.

47. Much of the turnaround reflects the effects of the automatic stabilizers. With relatively high tax burden to finance the generous welfare system, public finances in Sweden are comparatively sensitive to cyclical fluctuations and labor market developments. The Spring Bill projects a sizeable widening of the output gap in 2009 (to 7.2 percent). In this context, the full operation of the automatic stabilizers accounts for more than half of the deterioration in general government finances.

Sweden: Fiscal Measures 2009–10

(In percent of GDP)

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Source: 2009 Budget Bill and 2009 Spring Fiscal Policy Bill.

Includes lower contributions to the unemployment insurance fund, changes in under-pricing rules, changes in interest deductibility, and widening of the CIT tax base.

48. In addition, discretionary fiscal measures are being implemented, amounting to 1.6 percent of GDP. These are mostly on the tax side, including permanent cuts in personal, social contributions and corporate income tax, amounting to 1 percent of GDP. Though these steps will yield supply-side efficiencies and the income tax cut was well targeted to lower income households, their immediate impact on aggregate demand is likely small. In particular, the estimated multiplier for such tax cut is only 0.35, compared with a 0.7 from expenditure measures. In response to further deterioration in the macroeconomic outlook, additional measures were introduced especially to boost active labor market policies.

49. The structural balance—on the authorities’ estimates of potential output—is projected to remain in surplus of at least 1 percent of GDP at all times through the projection period—consistent with the fiscal rule. But the margin for error—or to allow further adjustment if needed—is limited under the rule. On official projections, public debt rises to 46 percent of GDP in 2012 (See Text Table).

50. A larger than projected deterioration in the fiscal accounts in 2009 appears likely, reaching a deficit of slightly above 4 percent of GDP, in part reflecting staff’s more pessimistic view about the near-term growth outlook ¶61). In addition, possible official overestimation of the structural balance in 2008—reflecting staffs more pessimistic view about Sweden’s potential growth in recent years—and the end of “windfall” revenues associated with the boom in asset prices, impacting corporate and capital income, also play a role in this difference of view. This assessment lowers even further the estimated margin for discretionary policy consistent with the fiscal rule.

Sweden: Comparison of Fiscal Outlook

(Percent of GDP)

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Source: 2009 Spring Fiscal Policy Bill and staff projections.

As a percent of potential output.

51. The budget outlook is relatively robust to assumptions about prospects for aging costs (Figure 12). Projections of these costs—2.6 percent of GDP over the period 2007-60 based on the 2009 Aging Report by the European Commission—compare with 5.2 percent for Euro area countries). Furthermore, the public sector balance sheet approach assessing the long-run intertemporal financial position based on staff baseline scenario shows positive net worth through 2060, albeit by a small margin (Table 9). Accordingly, debate about changing pension adjustments for asset returns raises concerns for sustainability. The rule requires cuts in nominal pensions in 2010 due to low recent returns. But even a “temporary” suspension of the rule could, de facto, become permanent if it is repeated. Adjusting the formula to smooth the path will address these long-term risks, only if smoothing is symmetric and the formula remains unchanged thereafter.

Figure 12.
Figure 12.

Sweden--Despite the weaker fiscal position, fiscal policies would remain sustainable but with smaller margin to cope with higher aging costs. 1/

2000-60

Citation: IMF Staff Country Reports 2009, 247; 10.5089/9781451836035.002.A001

Source: Commission Aging Report 2009.Source: IMF staff calculations based on information provided by the authorities.

A change to the expenditure ceiling framework may be needed

52. In the current economic downturn, the established fiscal indicators (the structural balance, 7-year rolling average and the cumulative overall budget balance measures) will malfunction. Even if the structural fiscal balance is maintained at a surplus of 1 percent of GDP, these indicators will flash red simply because headline budget balances, boosted by automatic stabilizers will show such large deficits during the recession. For this reason, these indicators should be deemphasized and an alternative means of showing adherence to the medium-term surplus target may be needed.

53. In this context, the firm commitment to the nominal spending ceilings should be maintained. This would also avoid a structural drift in spending especially when the underlying fiscal position is difficult to measure. In addition, this allows automatic stabilizers to operate unhindered on the revenue side, while accommodating considerable latitude for this on the spending side. However, to ensure that this is consistent with the surplus target over the medium-term, any impact on net revenues reflecting further discretionary tax reforms on projected budget balances need to be offset by an equal downward adjustments in expenditure ceilings. The Fiscal Council could play a useful role in monitoring compliance with the letter and the spirit of these principles. This option remains under review by the authorities (Attachment III; ¶63).

C. Monetary Policy and Framework

Inflationary pressures have abruptly eased

54. Inflation has fallen below the lower bound of the target—2 percent ±1 percent—(Text Figure). GDP is projected to contract further and output gap to widen. Wage growth has continued to slow. Inflation expectations have fallen, but in recent months have risen back to a low range. In this context, though real interest rates measured using the headline inflation rate have remained broadly unchanged, this largely reflects commodities price falls and the impact of the interest rate cuts on housing costs in the headline measure. Real interest rates measured relative to inflation expectations and to underlying or core measures of inflation have, appropriately, fallen significantly.

uA01fig07

Inflation forecast

(Annual percentage growth)

Citation: IMF Staff Country Reports 2009, 247; 10.5089/9781451836035.002.A001

Source: Riksbank.

An undershoot of the 2009 inflation target is now likely

55. The staff’s baseline forecast—consistent with the authorities—is for a steady decline in inflation through most of 2009, followed by a return to a positive inflation—but still below the lower bound of target—by the middle of 2010 (¶64). This forecast is based on (i) the authorities’ expansionary fiscal policy stance; (ii) subdued commodity process (WEO projections); and (iii) the growth outlook discussed in Section III.

However, the monetary stance should be retained, for now

56. Risks of sustained disinflation appear low. Nominal wage patterns, inflation models, market analysts’ assessments, and short and long-term indicators of inflation expectations, including 5-10 year breakeven inflation rates, all point this way, with many of the latter having rebounded from troughs at end-2008. This partly reflect significant depreciation of the exchange rate since fall 2008, which has, implicitly, relaxed monetary conditions considerably.

57. Accordingly, the case for further immediate steps into Quantitative Easing (QE) is not compelling. As the authorities indicate, only if inflation expectations fall below target on a sustained basis, should consideration be given to the various QE options (Box 9; ¶65). Actions to support individual credit markets, if any of these fail, should remain under review, nevertheless.

Options for Quantitative Easing

  • Outright purchase of assets. In close coordination with the Ministry of Finance, the Riksbank could increase purchase of government bonds at its own discretion. This measure is expected to lower long-term government bond yields. The Riksbank could also assist specific frozen markets, such as mortgages, to restore normal functioning of the monetary transmission mechanism. However, risks to the Riksbank’s balance sheet as well as an exit strategy should be considered, with the government guaranteeing the Riksbank against financial losses, if needed.

  • The usage of the NDO’s treasury functions. The NDO could increase the issuance of treasury bills in exchange of frozen market securities. This option would clarify the division of labor between monetary and fiscal functions.

  • Non-sterilization of foreign asset purchases by the central bank could be considered.

The Inflation Targeting framework serves well

58. The Riksbank is among the most transparent of inflation targeters. It publishes policy committee minutes with two-week lag, a three-year inflation forecast, and corresponding interest rate path. This enhances effective communication. Recently, publication of individual votes of the Executive Board members has begun. However, in 2007, the government-sponsored special commission proposed amendments to the Riksbank Act, aimed at strengthening the Riksbank’s financial independence. Until now, no follow-up actions have been taken. And, as with inflation targeting regimes elsewhere, there may be need in the aftermath of the global financial crisis to review if and how their operations could be further strengthened in light of that experience.

59. The recent decision to raise international reserves by SEK 100 billion—2 percent of total external debt—will boost resilience (See Text Table). As the authorities suggested, although reserves are complemented by a swap arrangement with the U.S. Federal Reserve and ECB, given that domestic and external bond amortization by large banks in 2009-10 is some four times larger than international reserves, additional holdings even beyond those planned would boost capacity to respond to banking sector liquidity stresses (¶65). The need for foreign resources for this purpose arises because destabilizing depositor withdrawals from subsidiaries of Swedish banks could spur similar withdrawals from their parents and from Swedish banks in general, and curb institutions’ access to international capital markets. In this way, banking stresses could spill over into pressures on the Krona. Thus, to support the subsidiaries, the exchange rate regimes of their hosts, and address possible fallout on the Krona, additional foreign currency resources may be required.

Sweden: Official Reserves

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Source: Riksbank.

Subsidiaries of Swedbank and SEB.

V. The Authorities’ Views 2

60. Sustained strong policies—as reflected in low inflation, significant current account and budget surpluses translating into long-term fiscal sustainability and low public debt, low unemployment, and structural labor market and tax reforms aimed at increasing supply-side efficiencies—have prepared Sweden well to face the global crisis (¶18–22, 43, and 58).

The economic outlook has weakened significantly

61. Given global conditions and recently revised quarterly national accounts data, the Ministry of Finance in the Spring Bill in April projects output to fall some 4¼ percent in 2009 (¶23–35). Downside risks are contained by expansionary fiscal and monetary policies, the strong automatic stabilizers, Krona depreciation, and the strong and flexible structural characteristics of the economy. In this context, reforms to unemployment benefits, labor market programs, and the tax regime in recent years will reduce risks of labor market hysteresis. But options for further such measures remain under active review.

Fiscal policy—allowing scope for large stabilizers—should remain bound by rules

62. Though stimulus measures predated the intensified global financial crisis from the Fall of 2008, they provided the stimulus needed in the face of the downturn. In this context, given firm commitment to maintain strong fiscal sustainability, no need is apparent now for further broad based discretionary fiscal stimulus, and the fiscal rule—targeting a 1 percent overall surplus over the cycle and respecting the three year expenditure ceilings—remains (¶144–51).

63. The risks of the established fiscal indicators malfunctioning, even if policy remains on course for its medium-term target, are recognized (¶52). But the appropriate option to address this difficulty remains under review. In principle, staffs suggestion of adjusting the expenditure ceiling mechanism would address the difficulty, but such a change runs the clear risk of undermining a long-established and credible anchor of the fiscal framework (¶53). In the authorities’ view, there is no alternative to a continued thorough annual analysis of the budget balance, notwithstanding the uncertainties associated with measures of the structural balance.

Interest rate cuts have successfully averted threat of disinflation

64. A further decline in the headline CPI is anticipated for the remainder of 2009, but underlying inflation (excluding mortgage interest rates) is expected to hover around 2 percent, and inflation expectations continue to be anchored at the target level of 2 percent. The outlook for policy remains accommodative, with the repo rate expected to stay at ½ percent through 2009–10. The impact of monetary actions already taken remains under review (¶ 54–56).

65. Nevertheless, the preparation for possible next steps are underway, partly because term rates remain more elevated than is desired. While the repo rate could be further lowered—the floor is not necessarily at ½ a percent—options for the unconventional measures included the provision of 12 month fixed rate loans at the repo rate and the outright purchase of government bonds. Beyond that, purchase of mortgage or corporate bonds would imply undue credit risks and distort still-functioning corporate credit markets (¶57). In regard to the exchange rate, the freely floating regime will be maintained, but increases in international reserves are warranted, on a pre-announced schedule, to address financial stability risks (¶59). The Riksbank targets inflation, but has no target for the Krona.

Financial sector stabilization policy is comprehensive

66. Liquidity support, the guarantee program, and other steps consistent with the EU response, have contributed to stabilizing financial markets (Box 4; ¶37). However, normal functioning has not resumed and the situation remains fragile. The recent stress tests for major banks show that loan losses are expected to rise, but banks will still meet the minimum regulatory capital requirements even under the most stressed scenarios (¶38–41).

67. The recent bank resolution law empowers the government to take over failing banks, with recourse for the shareholders to the Examination Board of three judges strictly limited to examine the appropriateness of the conditions—the takeover itself is not subject to review by the Examination Board or any other legal authority. Looking ahead, as credit losses become clearer, banks may have to raise capital to fill the shortfalls over time. If needed, banks will be recapitalized through government capital injections of common stock. Swedish banks have made commitments to continue to support their subsidiaries with liquidity and capital. Since the outbreak of the crisis, the authorities have continuously been involved in a dialogue with the major Swedish banks. It should be noted that the measures that the government has adopted have not been ring-fenced and have thus been able to benefit entire banking groups. Looking ahead, the government’s actions will be guided by need to safeguard the legitimate interests of taxpayers (¶39–41).

Table 1.

Sweden: Selected Economic and Social Indicators

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Sources: Statistics Sweden; Riksbank; Ministry of Finance; Datastream; INS; and IMF staff estimates.

Includes SEK 100 billion borrowing planned by National Debt Office, at June 15, 2009 market exchange rate.

Based on relative unit labor costs in manufacturing.

Table 2.

Sweden: Medium-term Scenario, 2007–14

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Sources: Statistics Sweden and IMF staff projections.

Contribution to real GDP growth.

In percent of nominal GDP.

Annual average, in percent.

In percent of potential GDP.

Table 3.

Sweden: Financial System Structure, 2002–08

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Sources: Riksbank, Financial Supervisory Authority, and IMF staff estimates.

Including parent banks’ foreign branches.

Not including minor local companies

Market value of funds

Number of institutions is computed on unconsolidated basis.

Table 4.

Sweden: Financial Soundness Indicators: Banks, 2003–08

(End-period, in percentage)

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Sources: Financial Supervisory Authority, Riksbank, and IMF staff estimates.

From 2007, the calculation of capital base follows rules under Basel II.

On consolidated basis

Table 5.

Sweden: Financial Soundness Indicators: Non-Banks, 2003–08

(End-period, in percentage)

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Sources: Financial Supervisory Authority, Riksbank, and IMF staff estimates.

End June 2008.