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Capital market.

10.1 Interest rates, currency flows and lending

Market rates of interest in Sweden fell sharply when the krona was pegged to the ecu in May 1991 (Diagram 10.1). The peg strengthened confidence in the exchange rate and currency flowed into Sweden (Diagram 10.2). The differential between the rate for treasury bills and the ecu narrowed in the course of the spring and summer to around 0.5 percentage points. Following currency outflows and some weakening of the krona since the beginning of June, market rates tended to rise in the latter part of the summer.

In the middle of November 1991 the Swedish money and currency market was affected by the devaluation of the Finnish currency. Substantial currency outflows were registered and at the turn of November the Central Bank raised the marginal overnight rate for bank borrowing, first to 11.5 per cent and then to 17.5 per cent, accompanied by market operations to maintain the higher level of interest rates. Market rates rose sharply and the differential widened appreciably. Currency movements turned into a net inflow.

Early in April 1992 renewed unrest in the Finnish market led to an extensive currency outflow from Sweden. In order to defend the exchange rate, the Central Bank raised the marginal overnight rate from 11 to 13 per cent.

European financial markets have been turbulent since the Danish referendum rejected the Maastricht Treaty at the beginning of June 1992. This unrest has to do with uncertainty about future cooperation in an economic and monetary union. Investors have switched to stronger currencies, primarily the German mark, and the weaker currencies have been exposed to downward pressure. This unrest was greatly accentuated by French opinion poles in the run-up to the EU referendum on 20 September. Together with the speculation in a devaluation of the Finnish currency, the tensions in the European money and currency markets had a substantial effect on Swedish interest and exchange rates in the late summer and autumn of 1992. These rates were also influenced by fears that the German Lombard rate would be raised to promote price stability. The unrest concerning interest and exchange rates also reflected domestic concerns: a rapidly growing government borrowing requirement, the weak outlook for the Swedish economy and the political situation. The krona weakened and currency flowed out of Sweden at the end of August and the beginning of September. The marginal overnight rate was raised 3 percentage points to 16 per cent, leading to a wider interest differential with the ecu.

When the Bank of Finland announced a free float for the mark, the Swedish Central Bank raised the marginal rate again on 9 September in two steps to 75 per cent to defend the exchange rate. To expand the facilities for currency market interventions, the foreign exchange reserves were reinforced but the Central Bank and the National Debt Office jointly borrowing the equivalent of 120bn kronor in foreign currencies from other central banks. The currency outflow ceased.

Following adjustments in the EMS and a reduction of German interest rates, the Central Bank lowered the marginal rate to 20 per cent in the middle of September, only to raise it again two days later, first to 75 per cent and later the same day to 500 per cent. This dramatic hike had to do with an acute European currency crisis on the eve of the French referendum; there was a flight to the German mark and weak currencies were devalued or left to float. This unrest led to heavy downward pressure on the Swedish krona and a substantial currency outflow that reached 59bn kronor in the week ending on 23 September.

On Sunday 20 September the Government and the Social Democrat opposition presented a joint package of restrictive economic measures to eliminate the structural component in the budget deficit. Additional measures were announced ten days later to strengthen business competitiveness. Since then the marginal overnight rate has been lowered a number of times.

The financial market unrest is reflected in cross-border trade in bonds, including treasury bills and certificates. In the first eight months of 1991 paper denominated in Swedish krona had been exported (net) for 33bn kronor, with a particularly large export in May after the krona had been pegged to the ecu (Diagram 10.3). In the first five months of 1992 foreign investors purchased for almost 25bn kronor, net, but this was followed in June by net sales for 17bn. The sharp outflow followed sizeable sales of 6-month notes in December 1991 in connection with the devaluation of the Finnish mark; when these notes matured, holdings were not renewed, resulting in a currency outflow.

Lending to the non-bank public from banks, housing credit institutions and finance companies has been slackening in the past year. In the 12 months through July 1991 the net stock of loan liabilities had risen 169bn kronor, whereas in the twelve months through July 1992 it fell 3bn (Table 10.1). The fall came from the stock of loans in foreign currencies, while the stock in kronor grew. This was accompanied by a shift from short to long credits from the housing institutions.
Table 10.1 Net lending to non-bank public(1)
12-month change at end June, billion SEK
 1991 1992
Banks 41.1 -64.2
In Swedish kronor 23.4 -0.4
In foreign currencies 17.7 -63.8
Housing credit institutions 144.6 82.5
In Swedish kronor: short-term 3.2 -21.5
 long-term 140.7 103.9
In foreign currencies 0.7 0.1
Finance companies -17.1 -21.7
In Swedish kronor -16.9 -14.3
In foreign currencies -0.2 -7.4
Total 168.6 -3.4
In Swedish kronor 150.4 67.7
In foreign currencies 18.2 -71.1
(1) Incl. 12.7 bn kronor for the stocks of loans that housing
institutions took over from other sectors in May 1991, of which
about 10 bn in long-term loans and 2.7 bn in short-term loans.
Sources: Central Bank.

10.2 Stock market

Share prices on the Stockholm Exchange rose 5.4 per cent in 1991, having dropped 30 per cent in 1990 (Diagram 10.4). The pattern in the course of 1991 was uneven. The index rose 30 per cent in the first half-year when the Gulf war ended and the Swedish krona was pegged to the ecu in May. Company reports in the spring also tended to stabilize share prices. In the second half-year the index was mainly affected by the weak economic situation and indications in interim reports that profits were falling. The failing real-estate market and growing credit losses among the banks contributed increasingly to the downward tendency. Share prices were also depressed when the overnight rate was raised in connection with the devaluation of the Finnish currency in November and the sizeable currency outflow from Sweden in conjunction with this. As a result of these factors, the rise of share prices in the first half of 1991 was virtually eliminated in the second half.

In 1992 share prices have also been erratic. The index rose early in the year but fell again in the spring. The abolition of the share turnover tax at December 1991 contributed to the initial rise, as did expectations of an economic recovery and lower interest rates. Another factor may have been the planned reduction of the tax on capital income from 30 to 25 per cent as of 1993.

The downturn for share prices in the spring can be attributed to a number of factors. The Stockholm Exchange was clearly involved in the downward trend for European bourses, which were influenced in turn by falling share prices in New York and Tokyo as well as by Denmark's rejection of the Maastricht Treaty. The world's leading exchanges have been subdued by persistently weak activity in the global economy as well as by the high interest rates that still prevail, to a substantial degree as a consequence of interest rate policy in Germany. In Sweden, the retardation of price and wage increases has left a high real rate of interest and lowered the value of assets in the form of real estate and shares, for instance. This depreciation and heavy mortgaging have resulted in a crisis in the property market, with bankruptcies and suspended payments. This in turn has involved the banks in credit losses via finance companies and their own property loans. The interim reports for the first three or four months of the year elicited a substantial price fall for shares in banks and real-estate companies. The interest and exchange rate unrest in the autumn also weakened share prices.

After net sales of Swedish shares in the late 1980s, foreign investors became more interested again in 1991, partly as a result of the ecu peg. The level of net purchases in 1991 exceeded 11bn kronor compared with little more than 1bn in 1990 (Table 10.1).

Swedish residents have been permitted to purchase foreign shares since January 1989. Net purchases of foreign shares in that year totalled 28bn kronor and then fell back to 14bn in 1991.

The increased activity among foreign investors, accompanied by a halving of the share turnover tax at the beginning of 1991 and its abolition at December that year, is reflected in an acceleration in the turnover of listed shares (in relation to the total listed value) from an average of 14 per cent in 1990 to 20 per cent in 1991. In the first quarter of 1992 the rate shot up to 33 per cent in annual terms but slackened after that.
Table 10.2 Cross-border trade in shares
Billion SEK, net
 1989 1990 1991 1991 1992
 jan-aug jan-aug
Shares -29.8 -18.6 -2.9 -1.3 1.1
 Swedish -1.9 1.2 11.2 7.9 7.8
 Foreign -27.9 -19.8 -14.1 -9.2 -6.7
Sources: Central Bank.
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Publication:The Swedish Economy
Date:Sep 22, 1992
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