Swedish Central Bank Hires BlackRock in Feud With Parliament

(Bloomberg) -- Sweden’s central bank just hired consultants from BlackRock to help it push ahead with corporate bond purchases at the center of a legal dispute with the country’s parliament.

BlackRock’s Financial Markets Advisory unit will assist the Riksbank in figuring out how best to approach an asset class never before included in its crisis packages. New York-based BlackRock has done similar work for the Federal Reserve, among others, as central banking moves into unfamiliar territory.

But in Sweden the step may prove more controversial as the Riksbank fights for its legal right to add corporate bonds to its quantitative easing program. The top expert advising the parliament committee overseeing the bank says such purchases are off limits under existing law.

The bank’s plight coincides with a similar battle playing out in the euro zone, where the powers of the European Central Bank have been challenged by Germany’s highest court. Both conflicts raise broader questions as to the real role of monetary policy.

Left Behind

The Riksbank has already bought corporate commercial paper as part of its roughly $30 billion QE plan to fight the fallout of Covid-19. But it’s so far refrained from touching corporate bonds, despite pledges to buy such assets. Meanwhile, markets are clamoring for the purchases to start, as Swedish issuers get left behind their euro-zone peers.

Claes Mahlen, head of trading strategy at Handelsbanken, said just knowing that BlackRock is now involved is likely to be “supportive of the credit market.”

Aside from the legal dispute surrounding the Riksbank’s QE plans, there are concerns over what it might do to liquidity, given the modest size of the debt market being targeted. The entire stock of investment-grade corporate bonds in Sweden is worth just $30 billion. By comparison, the euro-denominated market for such debt is $2.5 trillion.

“I hope BlackRock’s analysis will be made public,” said Kristin Magnusson Bernard, global head of macro research at Nordea Bank in Stockholm. “It would be good to have an open and well informed discussion on the extent to which it’s possible to use purchases of corporate bonds for monetary policy purposes in Sweden.”

Riksbank Governor Stefan Ingves has insisted the bank needs to be “able to fully utilize” the balance sheet if its crisis response is to be effective. Part of his reasoning is that there’s little point in lowering the main interest rate, which is at zero.

Niklas Schullerqvist, the top legal expert advising the parliamentary committee in charge of overhauling the Riksbank’s policy framework, says the purpose of the Riksbank Act is to allow for repo transactions of corporate bonds. And although the provision does not exclude outright purchases of such bonds, it is not the intention due to the liquidity situation in the corporate bond market.

Read More: Sweden Gets Dragged Into ECB-Style Legal Battle Over QE

The tension has left market participants wondering whether the Riksbank’s current mandate, formulated decades ago when rampant inflation was the main concern, is at all suited to the current crisis.

“We’re seeing the beginning of the end of the inflation target era,” said Andreas Wallstrom, deputy chief economist at Swedbank. “Some would say it’s already long overdue.”

“For every crisis we’ve been through, the limits have moved,” Bernard said. “Central banks have gone from lenders of last resort to buyers of last resort.”

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