Sweden Sees End of Low-Debt Era as Economic Support Rolled Out

(Bloomberg) -- Sweden’s debt office is bracing for turbulence in the government debt market as the country begins financing an array of measures to support the economy through the Covid 19 pandemic.

“I don’t think any market will be left unaffected by this,” Hans Lindblad, director general of the Swedish National Debt Office, said in an interview. “How long term these effects will be depends also on how drawn-out the crisis will turn out.”

After years of running large budget surpluses that have helped push public debt levels to historical lows, Sweden is now poised to ramp up borrowing and sharply increase the amount of government papers on the market.

Nordea Bank has estimated the stock of Swedish Treasury bills could “easily” reach 300 billion kronor ($29.9 billion) by the end of 2020. That compares with the debt office’s estimate of 55 billion kronor made in February, before the virus spread widely in Europe.

What that surge in supply will mean for pricing and demand is hard to say at this point. Because of Sweden’s “very strong public finances,” the country’s public debt will still be “far below” many other countries, Lindblad said.

A complicating factor will be the effect of central banks’ quantitative easing programs.

“They are currently absorbing a lot of government bonds through QE,” Lindblad said. “These balance sheets are at some point going to be shrunk.”

Lindblad shrugged off concerns about liquidity in the government bond market. The Swedish central bank’s purchases of large chunks of the stock has been a major sore point among investors, and the Riksbank has signaled continued interest in buying bonds.

“We don’t have a problem: Liquidity wasn’t very good earlier,” Lindblad said. “Right now, everything is more volatile. But we are doing pretty well.”

Already this month Sweden will feel the impact from the new measures. The increased funding need will first be covered by the government’s cash holdings, Lindblad said. Short-term financing also will be used, and gradually channeled over into government bonds, he said.

“We are obviously going to need to revise our forecast,” Lindblad said. That will be done on May 19, when the debt office has a regular borrowing update already scheduled.

Nordea Expects Corona Stimulus to Revive Swedish Bill Market

That may be a disappointment to some economists. The urgency of the situation raised expectations that the agency would reveal details of its strategy sooner. But Lindblad said the debt is “sticking to that date” in the interest of openness.

“We want to do this in good order, being fully transparent and as thorough as possible,” he said.

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