MNI INTERVIEW Debt Markets, Not Banks, Worry Swedish Regulator

--Swedish Debt Markets Cannot Continue To Be Reliant On Support

By David Robinson

     LONDON (MNI) - Sweden's bond markets may need reform when the Covid-19

pandemic eases, as the absence of liquidity in the early days of the crisis

underlined their fragility, one of Sweden's leading regulators told MNI in an

interview, noting that there can't always be a fall back on support from the

financial authorities.

     Although the banks have long been seen as the vulnerable point in the

financial system, this time around they have continued to function normally and

it was the near total drying up of liquidity in the bond markets through the

early days of the crisis that caused the greatest headaches, according to Henrik

Braconier, Chief Economist and Executive Director at Swedish Financial Services

Authority Finansinspektionen (FI).

     "That is serious because these markets have grown in importance. We are

relying more on the bond markets and commercial paper and if they are not

resilient in a crisis then either some non-financial firms will be shut out of

funding or they will go back to the banks, and then we haven't solved the bigger

issue," he said.

     To help ease liquidity, the Riksbank said in the opening days of the

disruptions it would buy up to SEK 300 billion of government, municipal,

mortgage and corporate bonds and commercial paper as part of its coronavirus

mitigation measure, but Braconier said it was unsatisfactory if these markets

had to rely on state support in every crisis.

     "There was a, more or less, sudden stop in many parts of the market, for

example relating to commercial real estate firms that needed to finance

themselves. But, things have thawed a bit although it is not as it was before

the crisis.

     Funding costs are up but markets are working," Braconier said, with the

Riksbank's asset purchase programme still being rolled out relatively slowly.

     While there are no pressing liquidity concerns at present "We don't want

some markets to be fully dependent on someone coming to save them every now and

then. So that is something we have to address," he said.

     --NO 1990S REPEAT

     Historically, the Riksbank has been wary over the nation's banking sector,

saying that could struggle to keep lending in an adverse scenario of a deep

recession and a property crash, but Braconier cast doubt on the plausibility of

this scenario, which assumed a partial re-run of Sweden's 1990's property crash.

     In its latest Financial Stability Report, published in late May, the

Riksbank warned that if the Covid-19 crisis was prolonged and loan losses

intensified, particularly from the real estate sector, banks may struggle to

maintain credit supply.

     The vulnerability of households to rising interest rates and falling

property prices was one issue for the central bank, with most consumers having

short fix-periods on mortgages, but Braconier doubted the likelihood of this

1990s style scenario playing out.

     "Even though we have a commercial real estate sector that we are concerned

about it is not nearly as vulnerable as it was in that time. And then on top of

that we had a real interest rate hike that was large and sustained and that is

really hard to see in the current environment that we are living in," he said.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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