Swedish Riksbank Pleads for Independence With Reserves Imperiled

(Bloomberg) -- Sweden’s central bank has issued its starkest warning yet that a government plan to halve currency reserves threatens its independence.

In an op-ed published in Sweden’s biggest morning newspaper, Dagens Nyheter, two of the bank’s deputy governors, Per Jansson and Cecilia Skingsley, said parliament must now intervene to reaffirm the Riksbank’s freedom from political interference.

“It’s unclear whether the purpose of the government’s proposal is to now begin exerting political control over the size of the foreign exchange reserve,” they wrote. They concluded by saying that they “hope” that parliament “clarifies that it still stands behind having a central bank that has a high degree of autonomy and maintains its task of managing liquidity support for banks in a crisis.”

The world’s oldest central bank is fighting a government proposal put forward in March to cut the reserves by more than half, moving some crisis response measures to the national debt office. The Riksbank argues the plan adds risk since it could slow down efforts to get liquidity to banks during a crisis. It has won backing from the European Central Bank, which in a hearing response warned the proposal would undermine independence.

Read more objections from the Riksbank here

“It’s pretty unique that they are taking it directly to the politicians like this,” said Robert Bergqvist, chief economist at SEB AB in Stockholm, in an interview on Saturday. “I can’t remember them ever doing that before.”

The government for its part has said that Sweden’s ability to support liquidity in a crisis will not be diminished. The plan will allow the government to take back roughly 250 billion kronor ($29 billion) in reserves amassed by the bank, cutting Sweden’s debt by about 5 percentage points of gross domestic product, and giving future governments more fiscal-policy leeway. Finance Minister Magdalena Andersson, when announcing the plan in March, said it had broad support in parliament. 

Read more on the government’s plan here

The controversy takes place against the backdrop of a broader global debate over central bank independence after almost a decade of unprecedented policy actions such as negative interest rates, quantitative easing and currency interventions. Sweden’s central bank has cut rates well below zero and bought up about 40 percent of the nation’s bond market in an effort to spark inflation.

The Riksbank governors “could surely have been affected” by the “the phenomenon they are seeing internationally of heading toward central bank mandates being more curtailed,” Bergqvist said.

Swedish lawmakers have initiated a broader review of the central bank’s mandate as monetary policy tests uncharted territory. A parliament committee said in June the Riksbank’s ability to request money from the state needs to be clarified and, pending the new rules, any build-up in reserves “should only happen if there are exceptional reasons and taking into account the state’s other borrowing needs.”

No timeline was given within which the Riksbank should act. Andersson, the finance minister, said in March she expected the reduction in reserves to happen “gradually,” with steps to start in 2018.

Falling Debt

Bergqvist said that while he understands the central bank’s concerns, the increased reserves have made Sweden’s balance sheet look more vulnerable. The bank’s fear that Sweden wouldn’t be able to borrow could also be overblown since the country’s debt levels may drop as low as 20 percent of GDP if the proposal goes through, he said.

“No one is going to doubt Sweden’s creditworthiness if there’s a problem with financing foreign currency,” he said. “We could borrow that money. The Swedish state has a lot of room.” He also noted that the Riksbank could also set up swap arrangements with other central banks, such as the Federal Reserve and the ECB.

Though the deputy governors were outspoken, they refrained from touching on what Bergqvist said was the logical outcome for fiscal policy.

"If we have low government debt levels, it could tempt the politicians to pursue a more expansive fiscal policy,” he said. “They are very careful not to make that link.”

To contact the reporters on this story: Jesper Starn in Stockholm at jstarn@bloomberg.net, Jonas Bergman in Oslo at jbergman@bloomberg.net.

To contact the editors responsible for this story: Jonas Bergman at jbergman@bloomberg.net, Tasneem Hanfi Brögger