By Jason Simpkins
Sweden yesterday (Monday) became the latest European country to announce it would inject capital into the financial markets and take equity stakes in the nation’s leading banks if necessary. The move was intended to calm investors and analysts who were afraid that Sweden would suffer a financial meltdown similar to that of Iceland.
The Swedish government said it would guarantee as much as $205 billion (1.5 trillion kronar) in new bank debt and set aside an additional $2 billion (15 billion kronar) in a financial stabilization fund to be tapped should any of the country’s financial institutions encounter a liquidity crisis.
Any financial institution that does receive capital will have to sign agreements that limit executive salaries and bonuses.
While Sweden’s banks remain stable, and have so far had no problems raising liquidity or capital, investors were made nervous by the banks’ exposure to the economies of Estonia, Latvia, and Lithuania, which are all either already in recession or careening towards one.
Swedish banks control two-thirds of total lending in the three former Soviet states, according to the Financial Times. Swedbank AB (OTC: SWDBY) is the largest bank in Estonia and Latvia, and SEB is the top bank in Lithuania.
Latvia’s economy grew by just 0.1% year-over-year in the second quarter and actually contracted when compared to the previous quarter. The International Monetary Fund (IMF) expects Latvia's economy to contract by 0.9% this year and 2.2% in 2009. The country’s budget deficit is expected to be 1.85% of projected gross domestic product (GDP) next year.
Estonia’s economy shrank at an annual rate of 1.1% in the second quarter, the most in almost 14 years, and while the IMF forecasts 0.7% GDP growth for Lithuania in 2009, the nation’s budget deficit will exceed the EU ceiling of 3% of GDP.
Financial Markets Minister Mats Odell hailed the Swedish government for proposing “powerful measures to mitigate the negative effect of the financial crisis on Swedish households and businesses.”
He also voiced confidence in Swedish banks, and characterized the new government measures as safeguards against global turmoil and market panic.
"The Swedish banking system is well prepared but is increasingly affected by the international financial turmoil," Odell said. "The government is therefore requesting a broad mandate to take the measures needed to restore confidence."
Confidence has been fragile throughout the duration of the financial crisis, but hadn’t been a problem in Sweden until the collapse of the Icelandic financial system. Iceland has been in dire need of financial help since the government took control of the country’s three major banks. The Nordic nation yesterday edged closer to landing a rescue package that would include assistance from the IMF, as well as a number of other central banks.
According to sources familiar with the situation, Iceland is poised to announce a $6 billion rescue package with the IMF that includes additional assistance from Norway, Sweden, Denmark, Russia, and possibly Japan.
Full details of the plan have yet to emerge but Iceland would receive about $1 billion in emergency cash from the IMF, the Financial Times reported.
As the financial crisis unfolded just weeks ago, Geir Haarde, Iceland’s prime minister, publicly chided what he termed Iceland’s "friends" for their lack of support.
"We have throughout this year asked many of our friends for swap agreements and for other forms of support in these extraordinary circumstances," said the prime minister. "We have not received the kind of support that we were requesting from our friends. So in a situation like that one has to look for new friends."
"In a situation like this it’s turning out to be every man for himself, every country for itself, everybody’s taking care of their best interest and that’s what we are doing," Prime Minister Haarde added.
IMF involvement was reportedly a precondition for the Bank of Japan and other Scandinavian central banks.
The IMF is not insisting that Iceland privatize its Housing Financing Fund, a state-run mortgage lender the FT reported. Nor is the fund laying out a timetable for the government to sell its shares of Landsbanki Islands, Kaupthing Bank or Glitnir Bank.
It is, however, seeking an overhaul of Iceland’s banking sector and fiscal policy. The IMF will ask the government to produce a plan for fiscal tightening that will be required to draw down debt levels that are expected to soar as high as 100% of GDP, the FT said.
News and Related Story Links:
Iceland to announce $6bn IMF-led rescue
Sweden launches financial stability package