O 051342Z DEC 08
FM AMEMBASSY STOCKHOLM
TO SECSTATE WASHDC IMMEDIATE 3948
TREASURY WASHDC IMMEDIATE
INFO EUROPEAN POLITICAL COLLECTIVE

UNCLAS STOCKHOLM 000809 
 
 
Treasury for DAS Eric Meyer, William Lindquist, Vimal Atukorala 
 
E.O. 12958:N/A 
TAGS: EFIN ECON PGOV SW
SUBJECT: Sweden: Update on Impact of Financial Crisis 
 
Ref: A) STOCKHOLM 707, B) STOCKHOLM 714 
 
¶1.  Summary.  On December 4 the Central Bank announced its largest 
ever steering rate cut (by 175 basis points, down to 2.00 percent). 
The current recession and lack of confidence in the financial 
markets have severely impacted businesses and households' ability to 
finance their activities.  The OECD report of early December gave 
Sweden an overall good rating, but pointed to some vulnerabilities: 
banks' exposure in the Baltics and the problems in the auto industry 
since Ford and GM officially put Volvo and SAAB, respectively, on 
their sales lists.  Politicians argue over appropriate measures to 
come to grips with the deteriorating situation, with the government 
announcing a three-year, USD 2.8 Billion, stimulus package December 
5 (septel will have details).  Sweden has experienced financial 
crisis managers in the Government and in the Central Bank.  The 
confidence they instill is giving the government a boost in the 
polls.  End summary. 
 
Dramatic interest rate cut announced 
------------------------------------ 
¶2.  On December 4, the Central Bank announced the largest cut in the 
history of its steering rate (called the "repo rate", which stems 
from repurchase agreement, and is the rate commercial banks get when 
borrowing or placing funds with the Central Bank for seven days). 
The rate was slashed by 175 basis points down to 2.00 percent.  The 
Central Bank stated that it expects it to remain at this level over 
the next year.  The unprecedented cut was considerably larger than 
the market had predicted.  Consequently, we might see effects on 
rates on the market, since the whole cut had not been factored in. 
 
Economic outlook 
---------------- 
¶3.  The economic tendency indicator, presented by the National 
Institute of Economic Research on November 26, which measures 
sentiments in the Swedish economy, continued to fall in November. 
The indicator fell to its lowest value since measurements began in 
¶1996. 
 
¶4.  Statistics released by Statistics Sweden, the Central Bank, and 
the Finance Ministry in recent weeks all point in the same 
direction: Sweden is now in a recession.  Commentators agree that 
the pace of the slow-down has far exceeded their worst fears. 
Nearly 20,000 layoffs were announced in November.  Current 
unemployment rate projections indicate that it will be approaching 
the 10 percent mark in 2010.  The current uncertainties surrounding 
the auto industry (Sweden's major export industry at 15 percent of 
total exports), which currently employs 140,000 people, trouble 
Swedish politicians in particular and the public in general. 
 
¶5.  OECD's prognosis is slightly more optimistic about Sweden's 
economy, forecasting a growth of 0.8 percent this year, no growth in 
2009, and 2.2 percent in 2010 -- which is better than the outlook 
for the entire OECD area during the next two years.  Other prognosis 
makers, including the major bank SEB, project that Sweden either 
will enter a recession in 2009 -- or has already entered one in 
¶2008.  All prognosis makers seem to agree that the outlook brightens 
in 2010, with a moderate growth rate projected for that year. 
Sweden's next general election is in September 2010.  If the 
unemployment rate will indeed be approaching the 10 percent mark 
then, the ruling Alliance government will have a difficult time 
getting reelected. 
 
¶6.  Judging from how the political debate is shaping up now, the 
parliamentary election in September 2010 will revolve around a 
Swedish version of "It's the economy, stupid!"  In the financial 
crisis to date, the Alliance government has earned high public 
opinion approval ratings.  Sweden's current large budget surplus 
gives Finance Minister Borg a cushion, and will allow for 
stimulation measures in Sweden to address the domestic situation. 
The strong state budget puts Sweden in an enviable situation when 
compared to other European countries. 
 
Financial market developments 
----------------------------- 
¶7.  The financial sector stabilization plan, which the Swedish 
government presented to Parliament in record time in late October, 
is still regarded with uncertainty.  To date, of all the major 
Swedish banks, only Swedbank has joined the government's guarantee 
fund.  Finance Minister Borg has repeatedly signaled his frustration 
with the lack of support ("solidarity," in his words) from other 
Swedish financial giants.  At first, rumors had it that the rates 
were rather unfavorable.  However, Swedbank came out in support of 
the program on November 26, commenting that this program had 
permitted it to secure a long-term loan of 2 Billion Euros, over 
three years, with an interest rate of 3.6 percent.  Swedbank's Head 
of Treasury, Mikael Edler, commented that obtaining this kind of 
credit has not been possible since Lehman Brothers collapsed in 
September. 
 
¶8.  The Central Bank released its biannual Financial Stability 
Report November 26, which stated that Swedish banks continue to be 
financially strong.  Even though credit losses have increased 
marginally, Swedish banks are still nowhere near the predicament 
they were in during the domestic financial crisis of the early 
1990s, commented Deputy Central Bank Governor Lars Nyberg.  The 
Central Bank has conducted stress tests on the Swedish commercial 
banks, and has found that they earn money, have a strong capital 
position, and could easily handle increased credit losses 
simultaneously in Sweden and Latvia. 
 
¶9.  Recent statistics from Statistics Sweden show that Swedbank and 
SEB customers withdrew large amounts of deposit funds, primarily in 
the time period up until the GOS raised the Deposit insurance amount 
to $61,000 October 6.  Swedbank lost 8 percent of its household 
deposits, compared to the level in late August.  Since then the 
trend has halted, but this still demonstrates the lack of confidence 
in banks with substantial exposure in the Baltics.  Both 
Handelsbanken and Nordea, which don't have similar operations in the 
Baltics, have instead experienced increased deposits during the same 
time period. 
 
Aid to Iceland; Bad Loans in Latvia 
----------------------------------- 
¶10.  On November 20, Sweden joined Denmark, Finland, and Norway to 
provide a joint loan worth $2.5 billion to Iceland to help the 
country cope with its acute economic crisis. The loan complements a 
$2.1 billion credit for Iceland approved by the International 
Monetary Fund November 19. 
 
¶11.  Problems in Latvia, Sweden's other financially-troubled 
neighbor, could have more immediate implications for Swedish banks, 
due to high levels of Swedish ownership in the Latvian financial 
sector.  One of Sweden's greatest fears is that Latvia will be 
forced to devalue its currency, the Lat, which is currently pegged 
to the Euro.  Avoiding devaluation is crucial to those Swedish banks 
with substantial lending in Latvia, and is also a top priority for 
the Latvian government.  Swedbank's CEO commented that "there are 
strong forces mobilizing to avoid devaluation in Latvia."  Swedish 
Finance Ministry and Central Bank officials have participated in the 
Latvia, EU, and IMF meetings in Riga over the past weeks. 
 
Troubled auto industry 
---------------------- 
¶12.  Car sales in Sweden dropped by 36 percent this November 
compared to November 2007.  For Volvo, the figure was 40 percent, 
for SAAB 45.  (Corresponding figures for U.S. sales of Volvo and 
SAAB in November were 46 and 57 percent.)  Facing financial 
challenges in their home markets, U.S. auto giants Ford and GM have 
announced that both Volvo and SAAB are for sale. 
 
¶13.  The car companies Volvo and SAAB are seen as Sweden's 
industrial crown jewels, even though they have been U.S.- owned for 
around a decade.  The current uncertainties about their ownership, 
and even continued existence, are major news in Sweden these days. 
Politicians from across the political spectrum have been demanding 
state intervention, even nationalization, to save the 'Swedish' auto 
industry.  Minister for Enterprise Maud Olofsson has repeatedly 
explained how EU legislation prevents the Swedish government from 
providing direct state support to these car giants.  However, the 
Swedish government continues to be under intense pressure to come up 
with something, anything, to alleviate the situation.  A poll 
conducted in late November showed that 7 out of 10 Swedes would like 
to see the state temporarily take ownership of Volvo. 
 
New dawn for the Euro debate in Sweden? 
--------------------------------------- 
¶14.  The few brave voices in Sweden who have dared in recent months 
to advocate Swedish adoption of the Euro have seen public opinion in 
favor of the Euro gradually increase.  Many Swedes have commented 
that having a single currency has been a strong driving and unifying 
force in the Euro zone's response to the financial crisis.  It 
appears that when the Krona is strong, Swedes want to keep it, but 
when it becomes weakened, they are anxious to be rid of it. 
However, only one of the four Alliance parties, the Liberal Party, 
is openly calling for a new national referendum on adopting the 
Euro.  The first EMU referendum was held in September 2003, where 
the "No"-side won by 53 percent of the votes.  In the final 
analysis, Swedish public opinion will need to firmly and steadily 
call for Euro adoption before Swedish politicians will dare to 
initiate talks about a new EMU referendum. 
 
WOOD