MNI INTERVIEW:Sweden Likely To Borrow To Cover Riksbank Losses

The Swedish government is likely to issue debt to cover significant losses caused by Riksbank quantitative easing, which carried on for longer than justified by financial stability concerns, the head of a National Audit Office review of the asset purchase programme told MNI.

While there has been no official announcement regarding the source of funding to remedy what the Riksbank says is an SEK80 billion capital shortfall prompted by losses on its bond portfolio as interest rates have risen, the National Audit Office’s Jorgen Appelgren said in an interview that fresh borrowing was the most probable solution.

“I do believe that the National Debt Office will issue bonds for the same amount and that sum will be transferred to the Riksbank. So we will have a larger government debt, we will also have larger interest rate (payments) for that debt," said Appelgren, whose report this month highlighted shortcomings in the QE operations.

RIKSBANK ARGUMENT REJECTED

The NAO rejected the Riksbank's argument that the initial reduction in government’s debt servicing costs due to asset purchases, which are in effect an interest-rate swap of fixed for floating rate payments with the latter made at the policy rate, justified its conduct of the programme.

"The Riksbank thinks that a lower interest rate has led to a fair amount of growth (and) 15 billion kronor over the years in lower interest rate payments for the government … (but it’s) like a football game where we have the winner at half-time. You have time to play the second half before you see the end result,” Appelgren said in an interview. “There might have been some positive effects but there should be a similar negative effect when you're going in the other direction, when the debt matures.”

The Audit Office concluded that quantitative easing dealt effectively with financial stress when the Covid shock hit in 2020, but that the central bank then went too far with a prolonged purchase programme across a wide range of assets which led its nominal holdings to peak at SEK972 billion in May 2022, including SEK405 billion in government bonds, SEK413 billion in covered bonds and SEK12 billion in corporate bonds. The Riksbank extended its asset purchases to new categories after it had bought up half of the total stock of public debt, Appelgren noted.

QUANTITATIVE TIGHTENING

“Going into corporate bonds, many people felt that that was unnecessary because the market had calmed down quite substantially at that time ... The financial stress during the pandemic was over, so why go on? They felt they had promised to do it and they should not break their promises," he said.

The Riksbank is now selling SEK5 billion of assets per month and in February its board will announce its decision on whether to accelerate quantitative tightening. Sales result in higher losses than allowing the bonds to mature but Riksbank Deputy Governor Per Jansson said that this was not a significant consideration. QT sales have gone well so far, with a good market reception, and increasing their pace could attract foreign buyers and boost the krona, he told a press briefing in response to a question from MNI.