Sweden detailed measures potentially worth more than 1.5 trillion Swedish krona ($205 billion) on Monday to support its financial firms, the latest country to try to shore up faith in the banking sector.
The government will offer guarantees on new borrowing by financial firms up to a maximum of 1.5 trillion krona ($205 billion) in total in return for fees from the banks. The offer to insure investors against the risk of a default on new bank debt will run to April 30, 2009, but the state has left open the possibility of extending it another eight months.
Sweden will also set aside 15 billion crowns in a financial stabilization fund which would be used to deal with a solvency crisis at a financial firm if one should arise in future. “The government is proposing powerful measures to ease the effects on Swedish households and companies of the financial turbulence,” Financial Markets Minister Mats Odell said in a statement.
Speaking to reporters, Finance Minister Anders Borg said he expected all of Sweden's banks to join the guarantee scheme. Three of Sweden's four biggest banks declined to comment on whether they would participate. One of the four, market leader Nordea, was not immediately available for comment.
Several European countries have taken measures to prop up banks with liquidity problems, guarantee borrowing and get credit markets moving before the current economic slump turns into a full-blown meltdown. But unlike some of these nations, Sweden is not injecting capital into banks now. Should this be necessary, institutions will have to issue preference shares to the state. Odell said Swedish banks were in good shape, but were being increasingly affected by international market conditions. The guarantee will only be given to banks with strong capital ratios.
Analysts said the measures should help ease strains. “By offering a guarantee, the government is making funding available for banks again, and that is very important,” said Andreas Hakansson, analyst at UBS. Rickard Strand, analyst at HQ Bank, said borrowing costs for banks were already falling, but that this should ease worries in the minds of lenders. “There are fewer and fewer reasons for the market to hesitate (to lend) now,” he said. Shares in the Nordic banking sector were up 4.75% at 0927 GMT. In recent weeks, the central bank and the debt office have tried to ease tight credit markets for banks in Sweden with dollar and Swedish krona loans.
But while short-term funding conditions for banks have improved, longer-term borrowing remains tough. “The proposed guarantee system for medium-term borrowing aims at improving the financing situation for these institutions,” Odell said. “That, in its turn, should result in conditions being easier for companies and households to get credit.”
Financial firms that avail themselves of the offer will face restrictions on wage hikes, bonuses and so-called golden parachutes for executives and payments to board members. The government will also set up a stability fund, into which it will put 15 billion krona, that would be used to bail out any key financial institution that ran into a solvency problem.
Swedish lenders will pay a risk-weighted fee to the fund, which is expected contain funds equivalent to 2.5% of the country's gross domestic product within 15 years. The exact cost to banks of accessing loan guarantees, or the contributions required for the stability fund, have yet to be detailed by the government. (Reuters)