Sweden’s central bank unveils loan package of $51 billion

Sweden’s central bank (CB) would lend up to 500 billion crowns ($51 billion) to Swedish companies via banks, moving to shore up credit flows as the coronavirus epidemic wreaks havoc on global financial markets.

The move follows emergency cuts by the Federal Reserve in the United States, the Bank of England (BoE) and Norway’s central Bank. The European Central Bank (ECB) announced a broad stimulus package this week, but stopped short of cutting rates.

The Riksbank, Sweden’s central bank, said the loans - equivalent to around 10% of gross domestic product - would be granted at its repo rate, at present zero per cent, with a maturity of two years.

“Our job here is to make sure there is money in the system so that people can buy stuff, and thereby hold economic activity up,” Governor Stefan Ingves told reporters.

Ingves said that the Riksbank was ready to do more if needed with the whole of the central bank’s armoury available, including boosting liquidity and buying bonds of different types, including mortgage-backed bonds.

“We could also, if it were needed, do currency interventions, and of course, we can also cut the repo rate, if we see that is a suitable measure.”

He said, however, a rate cut was not needed now.

“Zero is already a low rate and 500 billion in free money is, in our opinion, more effective in the current situation than making small changes to the interest rate.”

Swedish Social Minister Lena Hallengren and Prime Minister Stefan Lofven hold a news conference in the government’s office regarding the availability of materials in the healthcare sector due to the outbreak of the Corona virus in Stockholm, Sweden, on Friday.

Policy makers around the globe are struggling to find the right tools to fight the effects of the coronavirus, which has forced mass shutdowns across different industries, disrupted supply chains and forced millions of people to stay home.

With monetary policy already ultra-loose in many countries - such as Sweden - central bankers have called on governments to do more to fight the downturn.

Sweden’s government announced a package of emergency measures on Wednesday and said it was ready to do more.

Swedbank economist Knut Hallberg welcomed the central bank’s move and said he expected further steps.

“I expect later on that the Riksbank will expand its quantitative easing programme and purchase more bonds, but I think the Riksbank will try to avoid a rate cut,” he said.

The Riksbank, which held its benchmark rate unchanged at zero in February after ending nearly five years of negative rates at the end of 2019, has expressed concern about ultra-low rates for long periods of time.

In neighbouring Norway, the central bank on Friday cut its key policy rate to 1.0% from 1.5% and offered extraordinary loans to the banking industry.

Also on Friday, Sweden’s Financial Supervisory Authority (FSA) said that while it had not seen any direct effects of the coronavirus on financial markets, it had lowered the so-called counter cyclical capital buffers for banks to allow them to maintain credit supply.

It also warned banks not to use the extra cash to boost shareholder returns.

“This is money aimed at cushioning the negative effects from the coronavirus on the Swedish economy,” FSA General Director Eric Thedeen said. “We at the FSA will therefore take it very seriously if the banks were to use this capital contribution to raise their dividends.” Meanwhile, the European Central Bank (ECB) was engaged in an unprecedented rearguard action on Friday after chief Christine Lagarde drew fire from investors and even heads of state for what they saw as a clumsy response to the coronavirus outbreak.

The ECB provided fresh stimulus on Thursday to support the euro zone economy as the pandemic hits activity, but Lagarde spooked markets by saying it was not the ECB’s job to help virus-stricken countries struggling in the debt markets, such as Italy.

She took to the airwaves to row back on her comments after a sharp sell-off in Italian government bonds and ECB Chief Economist Philip Lane reinforced the more supportive message the following day.

“We will not tolerate any risks to the smooth transmission of our monetary policy in all jurisdictions of the euro area,” Lane said in a surprise blog post on Friday.

But the damage was done. The presidents of Italy and France, both staunchly pro-European, took the rare steps of publicly criticising the ECB for, respectively, failing to show solidarity and doing too little to support the economy.

Reuters