Swedish Central Bank Rolls Out $51 Billion Loan Plan to Ward Off Recession

(Bloomberg) --

Sweden’s Riksbank has decided to lend up to 500 billion kronor ($51 billion) to the country’s banks in an effort to maintain the supply of credit to Swedish companies.

The measure “should be regarded as a form of insurance that enables Swedish companies –- particularly small and medium-sized enterprises –- to feel secure that the credit supply will not fail,” said Governor Stefan Ingves.

The loans will be granted at a variable interest rate equivalent to the Riksbank’s repo rate, at present 0%, and will have a maturity of two years, according to a statement on Friday. The central bank also says it’s ready to take further measures, even between ordinary monetary policy meetings.

“We can do more if it turns out that the funds offered aren’t enough,” Ingves said in a press conference in Stockholm. He likened the current situation to “a bit like skiing downhill while someone keeps moving the slalom poles all the time.”

The Governor also said that the announced measures by the Riksbank are “also giving the fiscal-policy side some time to decide on what should be done and in what way.”

Danske Bank’s chief economist Michael Grahn thinks the central bank’s actions will be needed “as the probability for a recession is getting high, not to mention deflation risks.”

The Riksbank has made clear it doesn’t want to resort to negative rates again, after ending half a decade of the policy in December. Instead, Governor Stefan Ingves has touted liquidity measures, like cheap loans to banks or an expanded asset-purchase program, as more effective tools in the current crisis.

It’s a response that distances Sweden’s Riksbank from some of the world’s most powerful central banks, which have turned to rate cuts to support their economies. The Federal Reserve delivered an emergency half-point cut on March 3 and has since backed that up with additional liquidity support.

“The Riksbank has been reluctant to cut rates and this is what they can do,” said Georgette Boele, a strategist at ABN Amro. “It should support the krona somewhat but if sentiment deteriorates the krona will fall again.”

Sweden’s krona advanced 0.4% to 10.8745 per euro as of 10. 23 a.m. in Stockholm on Friday, after earlier touching a session high of 10.7681.

The European Central Bank opted not to cut rates, and instead just offered more liquidity. So far, the measures presented by central banks have had mixed results in stemming the panic.

Swedish policy makers are eager to find the right tools to address the threat that the coronavirus poses to trade and travel. And with exports making up half of Sweden’s economy, the government says it’s already clear the fallout of the virus will wipe about 0.3 percentage points off GDP.

Capital Requirements

In a further boost for the country’s banks, Sweden has followed Denmark and Norway by cutting a key capital requirement on Friday.

The FSA of the Nordic region biggest economy announced that the countercyclical buffer is being cut to zero from 2.5%, translating into a 45 billion Swedish kronor ($4.6 billion) reduction in capital requirements for the country’s lenders and creating “a capacity of around 900 billion kronor for new lending.”

Disruptions from the coronavirus are having “a negative impact on the financial system,” the FSA’s Director General Erik Thedeen said. And while risk appetite on the market has decreased, he says “it is ideal for the banks not to restrict their lending.”

Riksbank to Lend as Much as SEK500b to Companies Via Banks

--With assistance from Love Liman.

To contact the reporters on this story: Charles Daly in Stockholm at cdaly22@bloomberg.net;Rafaela Lindeberg in Stockholm at rlindeberg@bloomberg.net

To contact the editors responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net, Charles Daly

©2020 Bloomberg L.P.