Ask most central bankers why a little inflation is a good thing, and they’ll give you some combination of these three reasons:
- Rising prices encourage businesses and consumers to spend more now in the hope of saving money in the future
- It’s easier for companies to cut real wages by giving people raises below inflation than it is to cut their pay
- Finally, and most importantly, it helps central banks push real interest rates low enough to get economies out of recessions
Imagine someone told you about a country where real output per person is at an all-time high and growing at an increasingly rapid pace, its employment rate is at the highest level in decades, the country’s housing sector is on fire, and its current account surplus is about 6 per cent of GDP. In the absence of other information, would you say this country should be:
- Worried about the costs of a (slightly) higher exchange rate?
- Concerned by the slow rate of (headline) inflation?
- Cutting interest rates deeper into negative territory?
If you answered yes to the above questions, congratulations! You’ve just described the behaviour of the Sveriges Riksbank. From their policy announcement on Thursday (our emphasis): Read more
Inflation indices that include interest payments are dangerous things, especially in countries where most debts have floating rates. An attempt to tighten temporarily causes headline inflation to accelerate, while rate cuts make it look as if inflation has slowed, irrespective of what else is going on in the economy. (This is separate from the intriguing Neo-Fisherian idea pondered by Professor Cochrane.)
These price indices are useful for measuring changes in real spending power, and arguably form a better basis for wage negotiations than ones that exclude debt service costs. But if you want to evaluate the performance of a central bank, or you work at one, you need to make sure you’re using a price index that doesn’t incorporate these swings. Read more
In our previous post, we were inspired by a fascinating note from Deutsche Bank to look into the peculiar behaviour of the “net errors and omissions” category in certain European countries’ balance of payments statistics, on the theory that these can tell us about capital flows occurring under the radar.
One explanation would be a desire to avoid tax. As Gabriel Zucman has noted, there are trillions of dollars more financial liabilities in the world than there are corresponding financial assets. That only makes sense if people are hiding their wealth from the authorities. And, as it happens, the places we identified as having particularly large hidden capital outflows — Sweden, Denmark, Finland, Italy, the Netherlands, and Austria — all have very high taxes, while Malta, which was a large recipient of hidden inflows, is known for being a convenient euro-denominated tax haven. Read more
Those with the patience to pore over balance of payments data occasionally get rewarded with surprising nuggets of insight.
As a case in point, a new note from Deutsche Bank points us to the mysteries contained in the “net errors and omissions” category. In theory, mistakes that occur each quarter should cancel each other out. In many places, however, summing up these flows up over time produces distinctly non-random patterns — what Deutsche Bank calls “dark matter”. Read more
Back in April, Paul Krugman wrote that Swedish post-crisis central banking has been “sadomonetarism in action.” (They had the audacity to modestly raise short-term interest rates in 2010-2011.) The criticism may lead to additional parliamentary oversight of the Riksbank.
So we recommend you read an important new speech from deputy governor Per Jansson that dispels many of the myths surrounding Swedish monetary policy. He makes two basic arguments: Read more
Sweden’s Riksbank cut its key interest rate to zero last week because inflation was too low. The Riksbank has been noted – and criticised – for raising rates in 2011 to tackle a credit and housing bubble. Peter Doyle, an economist and former mission chief for Sweden for the IMF, argues that the recent experience of the world’s oldest central bank has more to teach policymakers.
One view of the Swedish Riksbank’s cutting its repo rate to zero is that this is a defeat for the use of monetary instruments to lean against financial fragilities. That conclusion is premature. It misses three more important implications for other monetary policymakers. Read more
*CISION: RECEIVED FINGERPRINT RELEASE FROM CONTACT AT FINGERPRINT
That would be the release announcing a $650m acquisition of Fingerprint Cards by Samsung, which – regrettably – has turned out to be completely made-up, and possibly a matter for the Swedish authorities. Read more
Scandinavian currencies have taken over the Swiss franc’s mantle of haven currencies of choice following the Swiss National Bank’s decision to attempt to put a ceiling on the value of the franc, the FT says. Since the SNB announced its move on Tuesday, the Norwegian krone has climbed more than 2.5 per cent to hit an eight-and-a-half-year high of NKr7.4825 against the euro, while the Swedish krona has gained 2 per cent to a three-month peak of SKr8.9420. Scandinavian currency bulls have been reassured by the reaction of central banks in Norway and Sweden. The former dismissed speculation that it would follow Zurich’s lead and intervene to weaken its currency, while Sweden’s central bank surprised investors by indicating that interest rates in the country were likely to rise by the end of the year.
Ericsson’s second-quarter profitability was hurt by contracts in Europe and India, losses at the Swedish telecoms equipment maker’s joint ventures, and higher-than-expected costs for a job reduction plan, the FT reports. Ericsson on Thursday reported revenue of SKr54.8bn ($8.54bn) for the three months to June 30, up 14 per cent compared with the same period last year. Net income rose 59 per cent to SKr3.2bn, fuelled by the sales growth. However, the closely watched gross profit margin was 37.8 per cent in the second quarter, down from 39 per cent one year ago. The deterioration was blamed on lower-margin mobile network contracts in India based on third generation wireless technology and infrastructure modernisation projects in Europe. More such European projects are expected in the second half of 2011, which could put further pressure on profitability.
Or, remembering the crisis dollar swap lines, and noting a funding currency elephant in the room for Australian and Swedish banks.
Moody’s downgrade of four Australian banks on Wednesday was serendipitous in a way. Note the rationale: Read more
Those who don’t keep up with Danish legal proceedings might have missed this development.
Last week, the country’s lawmakers sat down to debate a tweak to the country’s Bankpakke III bailout (or should that be bail-in?) bill. The change would promote private buy-outs of troubled banks, with the help of funds from Denmark’s deposit guarantee, thereby sidestepping some of that bail-in requirement. Read more
Sweden’s government will sell up to 6.3% of Nordea, the largest Nordic bank, to institutional investors, marking the start of the disposal of its 19.8% stake in the bank, reports the FT. At Thursday’s share price, the stake would raise just over $3bn for the Swedish treasury. The sale, set for auction on Friday, would kick off a fresh round of privatisations by the centre-right government after its re-election last September. The Nordea stake has been high on the list of assets earmarked for sale but the finance ministry surprised investors on Thursday with its announcement. It will initially sell 200m Nordea shares, and may extend the offer to a further 55m shares. The WSJ adds the sale will reduce the government’s stake to 13.5-14.8% of the bank.
No, not north to German bunds. Further north.
Pär Magnusson and Filip Andersson — Scandinavian macro and fixed income analysts at RBS — have a few things they want to get off their chest at the moment, clearly. As they write (emphasis and link ours): Read more
Sweden’s prime minister on Sunday urged the country to “stand up for tolerance” after a botched terrorist attack in central Stockholm on Saturday highlighted growing Islamic extremism across the usually peaceful Scandinavian region, reports the FT. Fredrik Reinfeldt condemned the attack, in which a suspected suicide bomber was killed, as an assault that risked inflaming racial tensions in a society with a large Muslim population. The incident followed warnings from Sweden’s security service of the growing threat from Islamic extremists and came amid a Norwegian probe into a suspected terrorist plot aimed at neighbouring Denmark
Presenting a modest proposal of sorts.
It’s been more or less confirmed on Monday that the UK and Sweden will indeed extend bilateral loans to Ireland as part of its international bailout. Read more
It’s another unexpected and slightly left-of-field decision from the Royal Swedish Academy of Sciences for the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (phew).
The 2010 prize has just been awarded jointly to Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides … “for their analysis of markets with search frictions“. Read more
Nordic countries on Tuesday gave the go-ahead for up to €444m more aid for Iceland’s stricken economy even as northern Europe counted the mounting cost of travel disruption caused by the eruption of an Icelandic volcano, reports the FT. The Nordic region has been among the hardest hit by ash fallout from the Eyjafjallajökull volcano yet Sweden, Denmark, Norway and Finland appeared to be in a forgiving mood as they agreed to end a long delay in funding for Iceland’s economic recovery programme.
That’s the share price of Sweden’s SEB — one of the Nordic region’s largest banks. About 11 per cent of SEB’s loans also happen to be to the Baltic region. Read more
Economic troubles have been bubbling away in Latvia for months, but the country’s government has so far stood strong in the face of rising pressure to devalue the currency to help mitigate some of the negative economic effects.
At the weekend, though, the clearest signals yet emerged that the country might be about to buckle: the government announced it was making budget cuts of 225m lats rather than the 275m lats expected, a clear contravention of its agreed terms with the IMF, which stipulated a cut of 500m lats. Read more
Latvia watchers will be awaiting the end of the IMF’s mission to Baltic country on Friday with trepidation.
We already know the talks have been difficult. And while Latvia technically can survive without receiving the second tranche of IMF aid being discussed, failure to do so could result in credibility issues. Meeting any new conditions on the €7.5bn worth it has already received from the IMF, meanwhile, could be tough for a country that has already had to extensively cut public spending to maintain its budget. Read more
No, that’s not a reference to the European Union’s diverse collection of fonts and languages. That’s actually the twitter challenge Sweden has set itself after kicking off its six-month European Union presidency 0n Wednesday.
From the presidency’s website: Read more
A run of the mill central-bank currency swap or tell-tale sign of something more ominous? The jury is still out here at FT HQ –thoughts welcome.
From the Riksbank: Read more
Jitters surrounding the fate of Latvia and its euro currency peg appear to have taken their first victim – the 50m lat sale of Latvian government Treasury bills on Wednesday. Here’s Reuters on the story:
RIGA, June 3 (Reuters) – The Latvian treasury failed on Wednesday to sell any of the 50 million Latvian lats ($100.7 million) of various treasury bills offered for sale on Wednesday, the stock exchange said. Read more
Here are some key statistical points regarding Sweden’s record GDP contraction of 6.5 per cent on the year in the first quarter, as handily compiled by Reuters:
- The contraction was the worst since the statistics office began publishing seasonally adjusted quarterly data in 1993, eclipsing the previous record fall set in the fourth quarter.
In their latest European banking note, Citi analysts (for, errr — cough cough –they should know) look at the claim “we are all Swedish now”. That, of course, being a reference to the Swedish banking crisis in which the state nationalised two of the country’s largest public banks for a number of years at the beginning of the 1990s.
As Citi quickly points out, the team is not advocating any particular policy approach. Rather: Read more
The German government softened some elements of its €500bn bank rescue scheme yesterday as arguments escalated over whether banks would be stigmatised for using the package. Banks can now apply to the newly created “financial market stabilisation fund” for debt guarantees without putting their businesses under the tutelage of the finance ministry. Seperately, Sweden has become the latest European country to take action to stabilise its financial system with the creation of a $205bn programme to boost liquidity and take direct stakes in its banks if needed.
Sweden’s banking system is solid, officials in Stockholm said on Monday. So solid, in fact, that the government is introducing a bank borrowings guarantee of $205bn.
There will also be a financial stabilisation fund ready for any financial institution that runs into a solvency problem. Just in case… Read more
Merrill Lynch analysts seem to know which they’d prefer. In a rare glimpse of optimism this morning, analyst Michael Hartnett sees the failure of Congress to approve the Tarp/EESA yesterday as potentially clearing the way for a much-improved bailout plan – something along the lines of the Swedish model. Could this be the source of some of the mysterious market optimism we’re seeing today? The promise of new medicine for banks?
The failure of TARP legislation worsens the short-term credit situation. But in so doing it increases the likelihood of a Swedish-style recapitalization of the banking sector in the US. This chemotherapeutic event marked the September 1992 equity low in Sweden. In stark contrast, the Japanese preference for the morphine of a ‘Price Keeping Operation (PKO)’ at exactly the same time condemned Japanese equities to a multi-year bearish trading range.
One of the world’s most lucrative investment banking mandates will come up for grabs in October when the Swedish government decides which banks will advise it on the sale of its multi-billion dollar stakes in a range of state-owned companies. The mandate has the potential to generate tens of millions of dollars in fees and is expected to prompt a deluge of interest form leading investment banks. Karin Forseke, Sweden’s newly appointed special adviser on privatisation, said on Monday that the mandate would be awarded in October but a decision would probably be made before the summer