From: tomas_e@LINK.Physchem.KTH.SE (Tomas Eriksson)
Subject: Re: Interest rates
Reply-To: tomas_e@LINK.Physchem.KTH.SE
Organization: Royal Institute of Technology, Stockholm
Date: Wed, 9 Sep 1992 12:55:22 GMT

In article <1992Sep9.115051.8353@rcvie.co.at>, se_haux@rcvie.co.at (Michael Haux) writes:
>
>I just received brief information from Sweden on much higher interest rates 
>from the swedish national bank. Could anyone provide me with more information, 
>analysis, etc. on this?

Finland abandoned their fixed exchange-rate policy yesterday, which in 
effect meant that they devaluated the FIM by roughly 15%. Just as the 
last time they devaluated, several actors in the capital markets began
to worry about a Swedish devaluation, which resulted in an outflow of 
currency from Sweden. "Riksbanken", the Bank of Sweden, raised its 
short-term interest rate to the banks to 24% yesterday. This wasn't 
sufficient to stop the outflow of currency, so this morning they loaded 
their large caliber gun and increased that interest rate to 75%. Bengt 
Dennis, who heads "Riksbanken", has also declared that he will use all 
means available to him to stop the outflow of currency and speculations 
about a Swedish devaluation. This could include even higher interest 
rates to the banks, if necessary, and taking up huge loans in foreign 
currency; in his statement, he said that Riksbanken and Riksg{lds-
kontoret (the government's debt managing office) were prepared to take 
up 120 billion SEK (approx. 23 billion USD) in short-term loans in
foreign currency to reinforce the currency reserve. This is a *huge* 
amount, and it shows that the since-1984 policy that the government
should avoid new loans in foreign currency doesn't really apply to the
Bank of Sweden's action in emergency situations.

The Bank of Sweden, which by the way isn't under governmental control 
(it's directly subordnate to the parliament, which means the government 
can not, and should not, direct the interest rates), wants to make it 
clear that the announced policy - EMS-like fixed exchange rates and 
absolutely no devaluations - is still in effect. "Sweden is not like 
Finland" is the message. Bengt Dennis has also warned that it didn't 
help the Finnish interest rates to devaluate.

The Swedish capital market has been in a volatile state today, and some 
mortgage institutions stopped all new loans at fixed interest rates 
yesterday, until the situation has stabilized, but to give an indication 
about the actual interest rates right now, 3-month and 6-month 
government bonds had an interest rate of approx. 26% and 18.5% 
respectively about 2 hours ago. One large mortgage institution just 
raised its mobile interest rate by 3.5% to 21%.

Apart from the "Finnish disease" and general chaos in European capital 
markets since the German interest rate increase some time ago, we have a 
few domestic factors which have contributed to a high interest rate in 
Sweden. (It's actually *extremely* high considering that the inflation 
in Sweden over the last 12 months has been only 2%!) First, there is a 
very large deficit in the budget (a figure of 100 billion SEK for 1992 
has ben mentioned, which ought to be in the region of 6% of our GDP,
together with a higher figure next year). The 1984 no-foreign-currency-
loans policy means higher interest rates in Sweden. I don't really see 
why the government should pay, say, 2% higher interest rates for its 
loans just to have them in SEK, if the fixed exchange-rate policy is 
"holy". It should really mean anything if they took their loans in DEM 
or ECU instead, at least to my naive mind. Another contributing factor 
is the political situation in Sweden. The non-socialist government 
doesn't have its own majority in parliament, but have to get votes from 
e.g. the populist "New Democracy" party. They have threatened to vote 
against the major government proposals this autumn, much because of "bad 
karma" between that party and the leader of the Liberal Party, Bengt 
Westerberg (minister of social affairs and deputy prime minister). If 
the government suffered these defeats, they would probably be forced to 
resign. This would leave Sweden with a very unclear political situation. 
This possibility, and the opinion of some people that the government 
isn't doing enough to reduce the budget deficits (at the same time, 
however, the social democratic opposition and many other are demanding a 
traditional keynesian policy, i.e. increasing budget deficits), has
added unsecurity about the future government policies. 

Tomas
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Tomas Eriksson                                          tomas_e@physchem.kth.se
            Surface Force Group, Department of Physical Chemistry,
               Royal Institute of Technology, Stockholm, Sweden