Front Matter Page

IMF Country Report No. 13/277

SWEDEN

2013 ARTICLE IV CONSULTATION

September 2013

Selected Issues

This paper on Sweden was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on August 2, 2013. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of Sweden or the Executive Board of the IMF.

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Front Matter Page

SWEDEN

SELECTED ISSUES

August 2, 2013

Approved By

European Department

Contents

• CHAPTER I. POTENTIAL OUTPUT AND UNEMPLOYMENT

• A. The Great Recession in Sweden

• B. Potential Output

• C. The Natural Rate of Unemployment

• D. Conclusion

• REFERENCES

• FIGURES

• 1. Contributions to Real GDP Growth

• 2. Unemployment Rate

• 3. Real GDP

• 4. Output Gap Estimates

• 5. Output Gap

• 6. Potential Growth Estimates

• 7. Contributions to Potential Growth

• 8. Inflation

• 9. Harmonized Consumer Price Inflation

• 10. Inflation and the Exchange Rate

• 11. Unemployment

• 12. Okuns Law: Change Form, 1993–2012

• 13. Okun’s Law: Gap Form, 1993–2012

• 14. Okun’s Law: Natural Rate of Unemployment

• TABLE

• 1. Output Gap Estimates

• APPENDIX

• Methodology

• CHAPTER II. SWEDEN AND THE GLOBAL BANKING SYSTEM: LINKS AND VULNERABILITIES

• A. Introduction

• B. Swedish Borrowers’ Foreign Bank Linkages

• C. Swedish Banking System’s Foreign Credit Exposure

• D. Scenario Analysis

• E. Conclusions

• REFERENCES

• BOX

• 1. Adjusting BIS Statistics for Coverage Break-in-Series and Exchange Rate Movements

• FIGURES

• 1. Cluster Analysis of Banking Bilateral Exposures as of 2012Q2

• 2. 2012Q2 Borrowers’ Foreign Credit Exposures as Percentage of Total Credit

• 3. 2012Q2 Nordic Borrower’s Foreign Credit Exposure by Country

• 4. Borrowers’ Foreign Credit Exposure by Sector

• 5. Swedish Borrowers’ Foreign Credit Exposure

• 6. Evolution of European Banks’ Foreign Exposures

• 7. Bank Losses after Specific Shocks

• 8. Deleveraging Needs after Specific Shocks

• TABLES

• 1. Bank’s Foreign Credit Exposures (Downstream Exposure) as of June 2012

• 2. Spillovers to Sweden from International Banks’ Exposures as of June 2012

• APPENDICES

• I. Measuring Banks’ Foreign Credit Exposures and Borrowers’ Reliance on Foreign Banking Credit

• II. Drivers of Foreign Banking Exposures

• CHAPTER III. COVERED BONDS AND FINANCIAL STABILITY

• A. The Use of Covered Bonds in Sweden

• B. Implications for Financial Stability

• C. Potential Impact of a Sharp Reduction in House Prices

• D. Conclusion

• REFERENCES

• BOX

• 1. How would a drop in House Prices affect Banks’ Overcollateralization Needs?

• FIGURES

• 1. Swedish Covered Bond

• 2. Largest Covered Bond Markets, 2011

• 3. Currency Composition of Outstanding Covered Bonds

• TABLE

• 1. Mortgage Loans that can be Included in the Cover Pool

• CHAPTER IV. HAS SWEDEN’S FISCAL POLICY BECOME LESS COUNTERCYCLICAL? REFERENCES

• FIGURES

• 1. General Government Total Expenditure

• 2. General Government Net Lending

• 3. Discretionary Spending in Sweden, 2000–2012

• 4. Response of Cyclically-Adjusted Primary Balance to Changes in Output Gap

• APPENDIX

• Econometric Methodology

• CHAPTER V. CONTINGENT LIABILITIES FOR THE SWEDISH GOVERNMENT AND OPTIMAL SIZE OF FISCAL BUFFERS

• A. Estimating Government Contingent Liabilities

• B. Optimal Fiscal Buffer and Speed of Accumulation

• C. Conclusions

• FIGURES

• 1. Bank Liabilities by Seniority and Methodology for Estimating Government Contingent Liability

• 2. Exposure of Nordic-6, by Geography 2012

• 3. Potential Fiscal Costs to Sweden of Bailing Out the Six Largest Nordic Banks

• 4. Target Fiscal Buffer as a Function of Contingent Liability

• 5. Model-based Transition Path for Government Debt to Build Optimal Fiscal Buffers against Contingent Liability

• TABLES

• 1. Largest Nordic Banks

• 2. Assumptions and Inputs

• 3. Timeline of Scenario Analysis

• 4. Estimated Fiscal Costs from the Failure of Big 6 Banks under Different Scenarios

• APPENDIX

• Methodology