## Sweden’s Fiscal Rules

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### Summary and appraisal: crisis impact and outlook
- Since 2002, Sweden benefited from buoyant global conditions with an export composition—investment goods and consumer durables—that was particularly favored by the boom.
- Sweden was highly exposed to the post Fall-2007 financial crisis because its investment goods and consumer durables exports were hurt by weakening external demand long before the major contraction in global trade late in 2008.
- Authorities’ response was prompt and appropriate; immediate concerns with financial sector stability have been addressed through the full range of measures typical elsewhere and incorporation of the agreed European Union (EU) response.
- Fiscal stance: the budget shifted from a surplus of 2½ percent of GDP in 2008 to a deficit of 4 percent in 2009.
- Staff projection: GDP is projected to fall by 6 percent in 2009 with recovery firmly taking hold only from the middle of 2010.
- Unemployment is expected to rise significantly as a consequence of the sharp fall in demand.

### Policy response and fiscal recommendations (2009–10)
- Continue large fiscal stabilizers and maintain the stimulus already underway.
- Staff view: additional discretionary fiscal activism beyond the current measures is not persuasive at this juncture because:
  - The change in the general government headline balance underway is, on staff projections, already one of the largest in the EU.
  - Plausible estimates of potential output yield widely varying estimates of the structural balance and the fiscal outlook.
  - It is unclear how much public debt will rise due to financial sector rescue operations that may prove necessary.
  - Stabilizers are large and multipliers are small.
- Staff-projected structural fiscal shift:
  - Weakening of 2¼ percentage points of GDP in 2009.
  - A further ¼ percentage point weakening in 2010.
- Composition of discretionary fiscal measures focuses on tax reductions to aid supply-side efficiency, acknowledging limited immediate demand impact.
- Strengthening fiscal-rule operation:
  - Maintain the target of a surplus of 1 percent of GDP over the cycle.
  - Maintain the firm commitment to nominal spending ceilings.
  - New commitment suggested: adjust spending ceilings to offset the net revenue impact of any further discretionary tax reforms on projected budget balances.

### Monetary policy and exchange rate
- Inflation target band: 1 to 3 percent (formal target: "2 percent ±1 percent" elsewhere in the text).
- Monetary assessment: a modest undershoot of the inflation target is likely in 2009; risks of sustained disinflation judged low given short- and long-term inflation expectations.
- Policy advice: only consider further monetary easing if inflation is expected to fall significantly and on a sustained basis.
- Riksbank actions and stance:
  - Policy rate cut by 425 basis points to ½ percent (later cut to ¼ percent in July 2009).
  - Riksbank switched from a tightening bias to an accommodating stance as crisis severity became apparent.
  - Repo rate expected by authorities to stay at ½ percent through 2009–10 (Riksbank forecast later projects repo rate to remain at 0.25 percent until autumn 2010).
- Exchange rate: probably modestly undervalued; recent depreciation likely an equilibrating adjustment given Sweden’s exposure to the global collapse in demand for investment and durable consumer goods.
- Options for Quantitative Easing (summary):
  - Outright purchase of government bonds or expansion of asset purchases could lower long-term yields; staff view: "case for further immediate steps into Quantitative Easing (QE) is not compelling" unless inflation expectations fall below target on a sustained basis.
  - NDO issuance and non-sterilization of foreign asset purchases are potential tools under review.

### Financial sector: fragilities, tests, and recommended actions
- Fragilities reflect Baltic exposures, recession, and banks’ reliance on funding from global wholesale markets.
- Stress tests indicate banks will meet regulatory minimum requirements even in highly adverse contexts, but market concerns about adequacy of capital remain.
- Reported capital metrics:
  - Overall capital adequacy: around 10½ percent.
  - Tier 1 capital adequacy: around 7 percent.
- Major-bank end-period indicators (selected exact pairs 2007/2008):
  - Regulatory total capital to risk-weighted assets: Nordea 9.2/8.6; SEB 11.0/10.6; Handelsbanken 10.4/10.6; Swedbank 9.3/11.2.
  - Regulatory Tier 1 capital to risk-weighted assets: Nordea 6.9/6.5; SEB 8.6/8.4; Handelsbanken 6.5/7.0; Swedbank 6.2/8.1.
  - Leverage (capital as a percent of total assets): Nordea 4.8/4.3; SEB 4.0/4.2; Handelsbanken 5.6/5.4; Swedbank 4.8/5.7.
  - Non performing loans to total gross loans: Nordea 0.6/0.8; SEB 0.5/0.7; Handelsbanken 0.1/0.2; Swedbank 0.1/0.5.
  - Of which: Baltic countries: Nordea 0.5/1.7; SEB 0.8/2.7; Swedbank 0.5/2.5.
  - Return on equity: Nordea 19.7/15.3; SEB 19.3/13.1; Handelsbanken 23.3/16.2; Swedbank 18.9/17.1.
  - Share of wholesale market funding: Nordea 25.6/23.0; SEB 22.5/21.6; Handelsbanken 38.0/41.5; Swedbank 41.9/32.8.
  - Loans to public deposits: Nordea 189.0/196.5; SEB 177.3/185.9; Handelsbanken 288.2/302.8; Swedbank 285.6/278.5.
  - Memorandum: Total assets in percent of GDP: Nordea 120.3/164.2; SEB 76.5/79.5; Handelsbanken 60.7/68.4; Swedbank 52.5/57.4.
- Recommended measures to strengthen resilience:
  - Boost capital when needed and develop contingency planning as soon as possible.
  - For at-risk banks: enhanced supervision and, if needed, rights issues.
  - If insufficient, consider public equity injections at prices appropriate to protect taxpayer interests and implementation of a bad-bank model.
  - Continue broader contingency planning, review toolkit for supervisory intervention, and consider further increases in international reserves beyond those already announced.
  - Boost institutional capacity of the Financial Supervisory Agency (FSA) and strengthen cross-border crisis resolution mechanisms in coordination with EU partners.
  - Remain on the standard 12–month consultation cycle.

### Bank resolution, recapitalization, and Baltic exposures
- Recent bank resolution law empowers the government to take over failing banks; shareholders’ legal recourse limited to Examination Board review of conditions.
- Recapitalization and support:
  - As credit losses become clearer, banks may have to raise capital; if needed, recapitalization through government capital injections of common stock is envisaged.
  - Government measures not ring-fenced have benefited entire banking groups.
- Baltic exposures and metrics (end‑2008):
  - Swedish banks’ equity and loan claims on their Baltic subsidiaries represented 8 percent of Swedish GDP.
  - Loans to subsidiaries amount to 35–45 percent of bank capital.
  - Reliance on operating profits from Baltic operations: 25 percent for Swedbank and nearly 10 percent for SEB.
  - Riksbank bilateral swap/loan actions in February 2009: with Latvia lend up to EUR 375 million; with Estonia lend up to SEK 10 billion.
- Recommended regional approach:
  - Develop coordinated contingency plans addressing division of crisis management responsibility; methodology for evaluating bank asset quality; restructuring policies; burden sharing agreements between home and host fiscal authorities.

### Near‑term macroeconomic outlook (2009–10) and projections
- Sweden may be both an early and chronic victim of the global recession given output and exports dominated by capital goods and consumer durables; exposure to the Baltics and slow recovery of global wholesale markets could compound the downturn.
- Imports of Sweden’s trading partners:
  - Grew on average over 8½ percent annually between 2004–07.
  - Grew by just 2½ percent in 2008.
  - Projected to fall 11 percent in 2009, recovering significantly only in 2011.
- Domestic demand projections:
  - Private consumption depressed through 2009; not expected to return to positive territory until early 2010.
  - Investment expected to fall through 2009, recovering beginning in H2 2010.
- Quantitative near‑term projections (selected exact figures):
  - Annual activity projected to shrink by 6 percent in 2009.
  - Exports projected fall in 2009: -17.0.
  - Imports projected fall in 2009: -16.6.
  - CPI (quarterly 2009): 0.2, 0.8, 0.5, 0.5; annual 1.8 in 2009. CPI quarterly in 2010: 0.5, 0.5, 0.5, 0.5; annual 2.1.
  - Nominal GDP annual change in 2009: -3.6 (quarterly: 0.0, -5.2, -0.7, -0.5).
  - Staff projected output path: quarterly GDP likely to fall through 2009—with annual activity projected to shrink by 6 percent—before recovering sufficiently to yield a flat path in annual terms by end-2010.
  - Recovery in global economy post-2010 anticipated to raise GDP growth up to 3¾–4½ percent during 2012–14.

### Fiscal developments, balances, and public debt projections
- Fiscal outturns in 2008:
  - General government fiscal surplus lowered from 3.8 percent of GDP in 2007 to 2½ percent of GDP in 2008.
  - Public debt stood at 38 percent of GDP at end-2008.
- 2009 outlook and policy stance:
  - With automatic stabilizers and fiscal measures, a large fiscal stimulus—6.6 percentage points of GDP deterioration in the headline budget balance—is expected.
  - Automatic stabilizers plus discretionary measures generate large fiscal support: "6.6 percentage points of GDP in 2009, on staff estimates."
  - Staff estimate for widening of the output gap in 2009: "7.2 percent."
  - Total discretionary measures: "1.6 percent of GDP."
- Budgetary composition (selected exact figures):
  - Main components of 2009 Budget Bill totaling "1.2" (percent of GDP): lower income tax "0.5"; 1 percent cut in social contributions "0.4"; CIT rate cut (from 28 to 26.3 percent) "0.2"; lower taxes on pensions "0.1"; spending increase (education, R&D) "0.2"; Other 1/ "-0.2".
  - Supplementary budget (January 2009): "0.3" (ALMPs "0.1"; Infrastructure "0.0"; Tax credits for home improvement "0.1").
  - 2009 Spring Fiscal Policy Bill (April 2009): "0.2 0.3" (Additional ALMPs "0.2 0.3").
- Multipliers (staff estimates):
  - Tax cut multiplier (income tax): "0.35".
  - Expenditure measures multiplier: "0.7".
- Staff baseline fiscal outlook (selected figures, percent of GDP):
  - Revenue 2009: "47.3"
  - Expenditure 2009: "51.4"
  - Overall balance 2009: "-4.1"
  - Structural balance 2009: "0.3"
  - Gross public debt 2009: "43.5"
  - Output Gap 2009: "-8.7"
- Authorities’ projection (Spring Bill): structural balance "projected to remain in surplus of at least 1 percent of GDP at all times through the projection period—consistent with the fiscal rule." Authorities’ Spring Bill selected figures (percent of GDP) for 2009: Revenue "52.1"; Expenditure "54.8"; Overall balance "-2.7"; Structural balance "1.2"; Gross public debt "43.4"; Output Gap "-7.2".
- Public debt official projection cited: "rises to 46 percent of GDP in 2012" (authorities’ official projections referenced).

### Fiscal-rule operation, monitoring, and recommended adjustments
- Main fiscal target: achieve a general government surplus of 1 percent of GDP over the business cycle.
- Supporting features: expenditure ceilings (rolling three-years ahead) for central government and social security outlays (excluding interest), and the balanced-budget requirement for local governments.
- Three indicators used by authorities to assess performance against the surplus target:
  - (i) the average overall budget balance since 2000.
  - (ii) a seven-year rolling average of the overall budget balance centered on the current year.
  - (iii) the structural overall budget balance.
- Staff concerns and recommendations:
  - Established fiscal indicators will malfunction during the downturn and could "flash red" despite policy being on course.
  - Recommendation: deemphasize malfunctioning indicators and consider "an alternative means of showing adherence to the medium-term surplus target."
  - Preserve "the nominal spending ceilings" as a firm commitment to avoid structural drift in spending.
  - Requirement: any impact on net revenues from discretionary tax reforms must be offset by "an equal downward adjustments in expenditure ceilings."
  - Role for the Fiscal Council: "could play a useful role in monitoring compliance with the letter and the spirit of these principles."

### Competitiveness and equilibrium real exchange rate (Box 3)
- Last year, staff analysis suggested considerable Krona undervaluation; since Fall 2008 the Krona has depreciated considerably and staff concerns have not increased ("rather less concerned than we were").
- Revisions to trend assumptions reduced assumed permanence of recent strengths:
  - Durables, investment-input, and investment exports constitute well over half of total exports.
  - Reduction in their earlier-estimated trend growth rate by 1/3 lowers total exports by some 1¼ percentage points of GDP by 2014.
  - Revised outlook for the Baltic states may lower investment returns by some 3 percentage points of GDP over the medium term.
- May 2009 CGER estimates: reported range large and measures uncertain; staff assessment: despite Krona depreciation since Q4 2008 the currency is probably not very significantly undervalued, supported by moderate inflation expectations and plummeting exports.

### Competitiveness, trade linkages, and VAR findings
- Exports and trade integration:
  - Exports as percent of GDP: 1985: 25.5; 1990: 26.3; 1995: 35.8; 2000: 46.6; 2005: 51.6; 2008: 56.7.
  - Imports as percent of GDP: 1985: 25.1; 1990: 28.1; 1995: 31.4; 2000: 40.3; 2005: 40.8; 2008: 46.8.
- Export composition (percent of total exports):
  - Electronic equipments and machinery: 1990–99: 37.9; 2000–08: 35.9.
  - Intermediate capital goods: 1990–99: 17.7; 2000–08: 14.7.
  - Other business services: 1990–99: 5.2; 2000–08: 8.9.
- VAR evidence:
  - A one percentage point increase in U.S. and Euroarea GDP growth is associated with as much as 3/5 and ¾ percentage point rise in Swedish GDP over four quarters (impulse-response illustrative magnitudes); impulse responses often statistically insignificant given small sample size.

### Longer‑run outlook: potential output, aging, and sustainability
- Prospects for potential output:
  - Most approaches suggest medium‑run potential growth in the region of 2 percent, but uncertainty is large.
  - Baseline uses segmented time trend approach.
- Aging and long‑term fiscal implications:
  - Projected increase in age-related spending (2007–60) per 2009 Aging Report: "2.6 percent of GDP" for Sweden versus "5.2 percent for Euro area countries."
  - Staff public sector balance sheet approach shows "positive net worth through 2060, albeit by a small margin."
- Risks and scenario impacts on public debt (selected exact figures):
  - External shock: permanent ½ standard-deviation shock to the interest rate → public debt increases by 2 percentage points to 51 percent of GDP in 2014.
  - One-time 30 percent depreciation in the REER (in 2010) → immediately increases public debt to 53.2 percent of GDP.
  - One-time 10 percent of GDP shock to contingent liabilities (in 2010) → public debt increases to 55.2 percent of GDP; assuming baseline speed of debt reduction thereafter, public debt would lower to 58.7 percent of GDP in 2014 (about 10 percent of GDP higher than the baseline).
  - Domestic ½ standard deviation shock to primary balance → debt in 2014 higher by 4½ percentage points of GDP (to 54 percent of GDP).
  - Combined confluence of shocks → impact modest at about 4 percent of GDP (relative to baseline).

### Crisis‑management governance and lessons from the 1990s Swedish model
- Essence of the Swedish model (1990s):
  - Special bank resolution bill enabling forward-looking evaluation of troubled banks, forcing shareholder recapitalization, and government takeover/nationalization powers.
  - Parliament authorized the BSA to provide an unlimited guarantee; political influence held at arm’s length.
  - Government commitment: total commitment SKr 88 billion (5 percent of GDP); total budgetary costs paid out SKr 65 billion (4 percent of GDP).
  - Nonperforming loans peaked at 13 percent of total loans.
- Key lessons and implications:
  - Timing and diagnosis: decisive action balanced with adequate diagnosis; Sweden’s two-year lapse before decisive action considered timely in retrospect.
  - Blanket guarantees: useful if credible and accompanied by exit strategies.
  - Liquidity provision and macro-first implication: macroeconomic adjustment (including depreciation) contributed materially to recovery.
  - Institutional memory: abolishing special resolution framework after the crisis left Sweden less prepared for strains emerging after Fall 2007; need to reform resourcing for the supervisor and strengthen resolution tools.
- Current assessment:
  - The Government Support to Credit Institutions Act (October 2008) gives the National Debt Office power to take over a troubled bank if there is serious systemic risk and bank capital falls below 25 percent of the regulatory requirement (¶67); effectiveness yet to be demonstrated.
  - Need for a Prompt Corrective Action framework, enhanced supervisory capacity, clearer early access to bank balance-sheet information, and stronger cross-border coordination.

### International reserves, liquidity facilities, and stabilization measures
- Monetary and stabilization measures implemented (selected exact items and estimates):
  - Riksbank policy rate cuts: repo rate cut by 425 basis points to ½ percent; later to ¼ percent.
  - Riksbank swap facilities with U.S. Fed: $30 billion reciprocal swap facility.
  - Riksbank began to restore foreign currency reserve funded by borrowing by the National Debt Office of equivalent SEK 100 billion.
  - Government increased deposit guarantee from SEK 250,000 to SEK 500,000 and extended coverage (October 6, 2008).
  - Debt guarantee scheme for medium-term borrowing of banks and mortgage institutions: total guarantee set at SEK 1.5 trillion, maximum SEK 0.5 trillion for covered bonds with maturity of 3 months -5 years.
  - Bank recapitalization scheme: government capital in form of shares or hybrid capital (Tier 1).
  - Staff estimate of net expected cost of all these actions: 7.7 percent of Swedish GDP.
- International reserves and reserve additions:
  - Recent decision: raise international reserves by "SEK 100 billion—2 percent of total external debt."
  - Stock of official reserves at end April 2009:
    - In billions of US dollar: "27.7"
    - In billions of SKr: "222.2"
    - In percent of total external debt: "4.5"
    - In months of imports of goods and services: "2.3"
  - Skr 100 billion additional reserves (conversion): "In billons of US dollar (SKr 7.8289=$ 1) 12.8"; "In percent of total external debt: 2.0"; "In months of imports of goods and services: 1.0"
  - Staff projection for end-2009 stock of official reserves: "38.1" (billions of US dollar) and "2.0" months of imports.
  - Rationale: additional foreign currency resources may be required because "domestic and external bond amortization by large banks in 2009-10 is some four times larger than international reserves."

### Executive Board and authorities’ views (summary)
- IMF Executive Board (PIN No. 09/102, August 7, 2009) conclusions:
  - Welcomed authorities’ prompt and appropriate policy responses; noted immediate prospects highly dependent on developments abroad and downside risks remain.
  - Financial stability highlighted as key immediate task; encouraged raising private capital where necessary and, if insufficient, considering public investment at prices protecting taxpayer interests and a bad-bank model.
  - Endorsed significant fiscal stimulus for 2009; most Directors did not see a need for additional discretionary fiscal action at present.
  - Suggested retaining current fiscal rules; many Directors considered supporting nominal spending ceilings with a new commitment that allows adjustments offsetting revenue impacts of discretionary tax reforms.
- Authorities’ (Sweden) statement (July 22, 2009):
  - Broad agreement with staff on overall assessment; Sweden has sound long-term prospects but is currently in a deep recession.
  - Authorities somewhat more optimistic than staff on output growth and export developments; noted recent increases in export orders and an improving PMI.
  - Authorities consider household and housing risks manageable based on stress tests; increased resources for the Swedish FSA by more than 10 percent for both 2008 and 2009.

*Source: _cr09247 - Sweden’s Fiscal Rules (IMF staff report).*

### 1.     Sweden’s Fiscal Rules ...........................................................................................

### Sweden’s Fiscal Rules

### Summary and appraisal: crisis impact and outlook
- Since 2002, Sweden thrived in buoyant global conditions, reflecting strong policies and an output composition—investment goods and consumer durables—particularly favored by the boom.
- Sweden was highly exposed to the post Fall-2007 financial crisis because its investment goods and consumer durables exports were hurt by weakening external demand long before the major contraction in global trade late in 2008.
- The authorities’ response was prompt and appropriate; immediate concerns with financial sector stability have been addressed through the full range of measures typical elsewhere and incorporation of the agreed European Union (EU) response.
- Fiscal stance: the budget shifted from a surplus of 2½ percent of GDP in 2008 to a deficit of 4 percent in 2009.
- Staff projection: GDP is projected to fall by 6 percent in 2009 with recovery firmly taking hold only from the middle of 2010.
- Unemployment is expected to rise significantly as a consequence of the sharp fall in demand.

### Policy response and fiscal recommendations (2009–10)
- Continue large fiscal stabilizers and maintain the stimulus already underway.
- Staff view: additional discretionary fiscal activism beyond the current measures is not persuasive at this juncture because:
  - The change in the general government headline balance underway is, on staff projections, already one of the largest in the EU.
  - Plausible estimates of potential output yield widely varying estimates of the structural balance and the fiscal outlook.
  - It is unclear how much public debt will rise due to financial sector rescue operations that may prove necessary.
  - Stabilizers are large and multipliers are small.
- Staff-projected structural fiscal shift:
  - Weakening of 2¼ percentage points of GDP in 2009.
  - A further ¼ percentage point weakening in 2010.
- Composition of discretionary fiscal measures focuses on tax reductions to aid supply-side efficiency, acknowledging limited immediate demand impact.
- Strengthening fiscal-rule operation:
  - Maintain the target of a surplus of 1 percent of GDP over the cycle.
  - Maintain the firm commitment to nominal spending ceilings.
  - New commitment suggested: adjust spending ceilings to offset the net revenue impact of any further discretionary tax reforms on projected budget balances.

### Monetary policy and exchange rate
- Inflation target band: 1 to 3 percent.
- Monetary assessment: a modest undershoot of the inflation target is likely this year; risks of sustained disinflation are judged low given short- and long-term inflation expectations.
- Policy advice: only consider further monetary easing if inflation is expected to fall significantly and on a sustained basis.
- Exchange rate: probably modestly undervalued; recent depreciation likely an equilibrating adjustment given Sweden’s exposure to the global collapse in demand for investment and durable consumer goods.
- Role of exchange rate and reforms: depreciation, alongside recent labor market and income tax reforms, will help contain unemployment increases and hysteresis concerns.

### Financial sector: fragilities, tests, and recommended actions
- Fragilities reflect Baltic exposures, recession, and banks’ reliance on funding from global wholesale markets.
- Stress tests indicate banks will meet regulatory minimum requirements even in highly adverse contexts, but market concerns about adequacy of capital remain.
- Reported capital metrics:
  - Overall capital adequacy: around 10½ percent.
  - Tier 1 capital adequacy: around 7 percent.
- Recommended measures to strengthen resilience:
  - Boost capital when needed and develop contingency planning as soon as possible.
  - For at-risk banks: enhanced supervision and, if needed, rights issues.
  - If insufficient, consider public equity injections at prices appropriate to protect taxpayer interests and implementation of a bad-bank model.
  - Continue broader contingency planning, review the toolkit for supervisory intervention, and consider further increases in international reserves beyond those already announced.
  - Boost institutional capacity of the Financial Supervisory Agency and strengthen cross-border crisis resolution mechanisms in coordination with EU partners.
- Governance recommendation: remain on the standard 12–month consultation cycle.

### Context (2004–08): the boom and its composition
- Activity rebound after 2001–03 was led by exports and associated investment; income flows from earlier foreign investments by Swedish banks and corporates provided an additional boost.
- Domestic factor markets tightened; positive wealth effects from booms in stock and house prices buoyed private consumption; household debt rose sharply; import growth caught up with and eventually outpaced export growth.
- Bank profitability grew rapidly between 2002–07, reflecting domestic and foreign lending, including in the Baltics.
- Export composition dominated by investment-related and durable consumption goods: computers, industrial machine tools, electrical equipment, chemicals, and increasingly business services—goods that disproportionately benefited from the global boom after 2002.
- Baltic EU entry in 2004 coincided with rapid growth in Swedish banks’ asset acquisition there, largely funded on international capital markets, generating high income reflows and strong bank stock performance.

### Institutional framework: fiscal rules and implementation
- Main fiscal target: achieve a general government surplus of 1 percent of GDP over the business cycle.
- Supporting features: expenditure ceilings (rolling three-years ahead) for central government and social security outlays (excluding interest), and the balanced-budget requirement for local governments.
- Authorities use three indicators to assess performance against the surplus target; the framework aims for cycle flexibility while responding to demographic trends to ensure long-term sustainability and intergenerational fairness.
- Implementation of IMF recommendations:
  - Fiscal policy and framework: authorities have maintained adherence to their fiscal rules.
  - Monetary policy: prior to fall 2008, the Riksbank maintained a tightening bias; since October the stance has been accommodative to keep inflation expectations from falling below the lower band.
  - Financial sector: a dedicated bank resolution framework has recently been implemented, but a clear PCA type framework, more rapid Deposit Insurance payout arrangements, and additional resourcing of the FSA remain outstanding.

*Source: _cr09247 - Sweden’s Fiscal Rules (IMF staff report).*

### Box 3. Competitiveness and the Equilibrium Real Exchange Rate

### _cr09247 - Box 3. Competitiveness and the Equilibrium Real Exchange Rate

### Competitiveness assessment and equilibrium real exchange rate (RER)
- Last year, staff analysis suggested considerable Krona undervaluation.
- Since Fall 2008, the Krona has depreciated considerably; staff concerns have not increased and are "rather less concerned than we were."
- Revisions to staff projections reduced assumed permanence of recent strengths:
  - Strength of Sweden’s exports and strong factor income in recent years now seen as reflecting temporary surges.
  - Composition of global demand during a bubble and unsustainable returns from bank investments in the Baltics were factors.
- Quantified impacts of revised trend assumptions:
  - Durables, investment-input, and investment exports constitute well over half of total exports.
  - A reduction in their earlier-estimated trend growth rate by 1/3 lowers total exports by some 1¼ percentage points of GDP by 2014.
  - Revised outlook for the Baltic states may lower investment returns by some 3 percentage points of GDP over the medium term.
- May 2009 CGER estimates (reported range large and measures uncertain):
  - External Sustainability estimate may overstate equilibrium exchange rate because ageing population calls for strengthening rather than stabilization of the net external position in the medium-term; appreciation implied by the RER estimate would be inconsistent with this.
  - Macro balance estimate is much smaller.
- Staff assessment (despite Krona depreciation since Q4 2008): the currency is probably not very significantly undervalued, supported by:
  - Moderate level of inflation expectations.
  - Plummeting exports (like elsewhere).
  - Similar goods competitiveness as realized during the last global downturn.

### External exposure and downturn dynamics (through 2008–09)
- By 2008, Sweden was highly exposed to external shocks.
- Timeline of transmission:
  - Swedish exports felt impact as early as Q2 2008, with significant acceleration in decline in Q4 2008.
  - Credit growth began to fall to households and corporates (gently); few signs of rationing even in April 2009 lending conditions survey.
  - Weaker consumer confidence—tumbling equity values, rising borrowing costs, later falling employment—led to greater precautionary saving through 2008 and falling consumption.
  - Investment fell starting Q2 2008; output fell throughout H2 2008.
- Banking and financial sector strains emerged:
  - Banks’ profitability fell sharply in 2008–09 despite negligible exposure to US subprime or other structured assets.
  - Two of the largest banks, increasingly funded on wholesale markets and exposed to the Baltics, saw sharp increases in loan losses; share prices and ratings were marked down.
  - Money market spreads tightened sharply in Q4 2008 and had not returned to pre-crisis levels by publication.
  - Stock market dropped nearly 40 percent in 2008, recovering somewhat recently.
  - Spreads of mortgage bonds over government bonds rose to unprecedented highs.
  - Solvency ratios of insurers fell.

### Swedish major banks: selected performance indicators (end period)
- Regulatory capital and leverage (2007 vs 2008, in percent where indicated):
  - Regulatory total capital to risk-weighted assets: Nordea 9.2/8.6; SEB 11.0/10.6; Handelsbanken 10.4/10.6; Swedbank 9.3/11.2.
  - Regulatory Tier 1 capital to risk-weighted assets: Nordea 6.9/6.5; SEB 8.6/8.4; Handelsbanken 6.5/7.0; Swedbank 6.2/8.1.
  - Leverage (capital as a percent of total assets): Nordea 4.8/4.3; SEB 4.0/4.2; Handelsbanken 5.6/5.4; Swedbank 4.8/5.7.
- Asset quality and Baltic exposure:
  - Non performing loans to total gross loans: Nordea 0.6/0.8; SEB 0.5/0.7; Handelsbanken 0.1/0.2; Swedbank 0.1/0.5.
  - Of which: Baltic countries: Nordea 0.5/1.7; SEB 0.8/2.7; Swedbank 0.5/2.5 (others not reported).
- Profitability and liquidity:
  - Return on equity: Nordea 19.7/15.3; SEB 19.3/13.1; Handelsbanken 23.3/16.2; Swedbank 18.9/17.1.
  - Share of wholesale market funding: Nordea 25.6/23.0; SEB 22.5/21.6; Handelsbanken 38.0/41.5; Swedbank 41.9/32.8.
  - Loans to public deposits: Nordea 189.0/196.5; SEB 177.3/185.9; Handelsbanken 288.2/302.8; Swedbank 285.6/278.5.
- Memorandum item: Total assets in percent of GDP: Nordea 120.3/164.2; SEB 76.5/79.5; Handelsbanken 60.7/68.4; Swedbank 52.5/57.4.

### Financial sector indicators and nonbank sector
- Non-performing loan ratios rose sharply in Baltic subsidiaries.
- Loans-to-deposit ratios at end-2008 were high for major banks.
- Bank bankruptcy and loan loss history show associated increases in loan loss ratios and bankruptcies.
- Funding structure showed reliance on wholesale funding and rising CDS spreads.
- Life insurance company assets declined in value; solvency ratios fell (Margin / required margin series).
- Corporate sector:
  - Corporate sector debts rose sharply in recent years (domestic borrowings, external borrowings, securities issuance).
  - Corporate sector interest coverage ratio (profits including financial income in relation to interest expense) weakened.
- Housing and household balance sheet:
  - Housing prices started falling; households' debt ratio reached unprecedented levels.
  - Households' debt ratio and interest ratio (in percent of disposable income) at high levels.

### Monetary and financial sector stability policies
- Monetary policy:
  - Riksbank switched from a tightening bias to accommodating as crisis severity became apparent.
  - Policy rate cut by 425 basis points to ½ percent.
  - Freely floating Krona depreciated significantly.
- Financial stabilization measures (summary of Box 4): Measures to increase Krona liquidity, increase foreign exchange liquidity, and support banks’ capital and market confidence:
  - Krona liquidity:
    - Since October 2008, repo rate cut by 425 basis points to ½ percent.
    - Riksbank started fully accepting covered bonds and lowered minimum credit rating requirements for long-term securities pledged as collateral.
    - New 3, 6, and 12-month loan facilities created.
    - New temporary credit facility using commercial paper as collateral (maturity up to one year).
    - National Debt Office issued treasury bills and invested funds in covered bonds to boost covered (mortgage) bond market.
    - Riksbank granted emergency liquidity assistance facilities to Kaupthing Bank Sverige AB and Carnegie Investment Bank AB (both SEK 5 billion); Kaupthing Bank later liquidated; licensing of Carnegie Investment Bank BA revoked.
  - Foreign exchange liquidity:
    - Riksbank and U.S. Fed set up temporary reciprocal swap facilities ($30 billion).
    - Separate swap facility established with the ECB.
    - New dollar term loan facilities (maturities of 28 and 84 days).
    - Riksbank began to restore foreign currency reserve funded by borrowing by the National Debt Office of equivalent SEK 100 billion.
  - Support for banks’ capital and market confidence:
    - Government increased deposit guarantee from SEK 250,000 to SEK 500,000 and extended coverage to include all types of deposit in accounts (October 6, 2008).
    - October 2008: government approved a debt guarantee scheme for medium-term borrowing of banks and mortgage institutions; total guarantee set at SEK 1.5 trillion, maximum SEK 0.5 trillion for covered bonds with maturity of 3 months -5 years; applicants pay fees and are subject to restrictions on senior management remuneration. Two financial institutions availed themselves of this guarantee.
    - Bank recapitalization scheme: government capital in form of shares or hybrid capital (Tier 1); participating institutions subject to restrictions on senior management remuneration.
    - October 2008 enactment of “Government Support to Credit Institutions Act” giving National Debt Office power to take over a troubled bank if there is serious systemic risk and bank capital falls below 25 percent of the regulatory requirement (¶67).
    - Government set up a stabilization fund financed by annual fees from banks and other credit institutions.
  - Staff estimate of net expected cost of all these actions: 7.7 percent of Swedish GDP.

### Fiscal developments and outlook
- Fiscal outturns in 2008:
  - General government fiscal surplus lowered from 3.8 percent of GDP in 2007 to 2½ percent of GDP in 2008.
  - Expenditure rose broadly in line with planned increase of 4 percent; revenue rose just 1.6 percent (compared with the budget-envisaged 4.1 percent).
  - Significant decline in asset prices (notably stock market indices) reduced corporate income and capital income tax receipts.
  - Excluding cyclical and one-off factors, structural balance estimated to have improved slightly in 2008 to about 2½ percent of GDP.
  - Public debt stood at 38 percent of GDP at end-2008.
- 2009 outlook:
  - With automatic stabilizers and fiscal measures, a large fiscal stimulus—6.6 percentage points of GDP deterioration in the headline budget balance—is expected.

*Source: _cr09247 - Box 3. Competitiveness and the Equilibrium Real Exchange Rate (IMF staff text).*

### 29.      Given output and exports dominated by capital goods and consumer durables,

### _cr09247 - 29.      Given output and exports dominated by capital goods and consumer durables,

### Near‑term macroeconomic outlook (2009–10)
- Sweden may be both an early and chronic victim of the global recession given output and exports dominated by capital goods and consumer durables, especially if global demand for those goods recovers slowly relative to other components of global demand.
- Exposure to the Baltics and the likely slow recovery of global wholesale markets on which Sweden’s banks have hitherto depended heavily could compound the downturn.
- Imports of Sweden’s trading partners:
  - Grew on average over 8½ percent annually between 2004–07.
  - Grew by just 2½ percent in 2008.
  - Are projected to fall 11 percent in 2009, recovering significantly only in 2011.
- Domestic demand and activity projections:
  - Private consumption growth depressed through 2009; not expected to return to positive territory until early 2010.
  - Investment expected to fall through 2009, with recovery beginning in the second half of 2010.
  - Falling imports will shield activity somewhat, though the trade balance will likely deteriorate in both 2009 and 2010.
- GDP and inflation projections:
  - Quarterly GDP will likely fall through 2009—with annual activity projected to shrink by 6 percent—before recovering sufficiently to yield a flat path in annual terms by end-2010.
  - Recovery in the global economy post-2010 is anticipated to raise GDP growth up to 3¾–4½ percent during 2012–14.
  - Weakness in the Baltics is expected to permanently lower income flows relative to the recent past.
  - Headline annual CPI inflation will be considerably lower through 2009 reflecting weak demand, the impact of lower interest rates on housing costs, and global energy and food price developments, despite the impact on prices from the Krona depreciation. A gradual increase—corresponding to that in demand—is expected in 2010.

### Quantitative near‑term projections (selected)
- Annual activity projected to shrink by 6 percent in 2009.
- Exports projected fall in 2009: -17.0 (quarterly series shows -7.8, -4.0, -1.5, -1.0; annual -17.0).
- Imports projected fall in 2009: -16.6 (quarterly series shows -8.4, -3.5, -1.7, 0.0; annual -16.6).
- CPI (quarterly): 0.2, 0.8, 0.5, 0.5; annual 1.8 in 2009. CPI quarterly in 2010: 0.5, 0.5, 0.5, 0.5; annual 2.1.
- Nominal GDP annual change in 2009: -3.6 (quarterly: 0.0, -5.2, -0.7, -0.5).

### Downside risks and mitigating factors
- Downside risks:
  - Prolonged global financial market strains, even weaker-than-projected export markets, and worse Baltic outturns.
  - Weakening housing and property markets, along with rising unemployment, decreasing collateral values and the supply of credit‑worthy borrowers.
  - Corporate financial positions are weakening; since 2007 companies’ capacity to cover interest payments has deteriorated.
- Mitigating factors:
  - Global recovery could be faster than projected.
  - Stabilization efforts in Baltic countries could succeed, with stronger-than-projected activity, reducing associated uncertainties.
  - Significant fiscal and monetary relaxations, including via a significant depreciation, could cushion the projected downturn in 2009.

### Prospects for potential output
- Conventional approaches (HP filtering of real GDP or simple estimation of Solow residuals in Cobb‑Douglas framework) may malfunction given the unique depth of the ongoing recession.
- Two additional exercises:
  - Modified production function allowing for deterioration in trend capital accumulation and trend growth in total working hours comparable to the early 1990s (provides a likely lower bound on trend growth in factor inputs).
  - Trend line fitted to Solow residuals from a Cobb‑Douglas decomposition with turning points reflecting breaks in 1975, 1995, and 2006; segmented time trend approach used as the baseline case.
- Most approaches suggest medium‑run potential growth in the region of 2 percent, but uncertainty is large and the “average” is not a strong result.
- Baseline uses segmented time trend approach; short‑term output gap estimates lie between extremes of standard methodologies.

### Financial sector policy and framework (2009–10)
- Challenges to financial stability:
  - Exposure to Baltic countries with faltering EU and Euro convergence aspirations.
  - Severe Nordic (including domestic) economic recession.
  - Banks’ reliance on global wholesale markets—now impaired—for financing.
- Authorities’ immediate actions (¶66–¶67):
  - Official liquidity support to cushion loss of wholesale finance.
  - Increased bank deposit insurance limits to stabilize the deposit base.
  - One domestic bank resolved; others have raised capital.
  - Authorities’ commitment to “do what is needed” has calmed deposit and interbank markets.
- Stress tests:
  - Riksbank and FSA published stress tests; both base case scenarios reflected 4½ percent GDP declines in 2009 and elevating credit losses in the Baltics.
  - Stress scenarios assumed GDP contraction at twice the base case rate for the stress scenario.
  - Under these assumptions, both sets of stress tests found that all banks observed the 4 percent Tier 1 capital requirement even in the stress scenario.
  - Despite best‑practice stress testing, market concerns about banks’ resilience remain (bank stock prices, CDS spreads, continued freeze in interbank market), though financial prices have eased from troughs.
- Policy recommendations and actions:
  - Ensure banks’ business models, contingency plans, and capital ratios signal institutional and market resilience; require significant steps toward resilience over a relatively short horizon.
  - Continue work with all banks to ensure appropriate contingency plans; enhanced supervisory scrutiny as first response for institutions most at risk.
  - Use Basel’s Pillar II approach to assign higher capital requirements to at‑risk banks, to be met over time including through new rights offerings and (as a bridge) via the government’s capitalization program.
  - Strengthen cooperation of domestic and host country authorities of foreign subsidiaries; develop coordinated contingency plans with relevant regional authorities.
  - Boost institutional capacity of the FSA, including prompt determination of strengthened arrangements for its ongoing resourcing, and expand its mandate to deposit‑taking non‑bank financial institutions.
  - Sweden implemented the third EU Money Laundering Directive on March 15, 2009.
- Box 6: Specific weaknesses to address in the financial stability framework:
  - Bank resolution framework: Government Support to Credit Institutions Act (October 2008) grants National Debt Office powers; effectiveness yet to be demonstrated.
  - Need for a Prompt Corrective Action framework covering all banks and fully empowering the FSA.
  - Supervisory capacity constrained by high staff turnover; need greater funding and stronger oversight over leverage ratio and maturity mismatch.
  - Deposit insurance funds can only be disbursed after a failed bank is placed into bankruptcy; early access to bank balance‑sheet information should be clarified.
  - Cross border coordination: MOUs lack specifics and are not legally binding.
  - Emergency liquidity assistance (ELA): generally sound for domestic problems, unclear for cross‑border liquidity problems.
  - Non‑bank financial institutions that raise deposits are not subject to FSA supervision nor reporting requirements.

### Baltic exposures and implications for bank support (Box 7)
- Swedish banks’ Baltic exposures are extensive; SEB and Swedbank hold significant market shares there (40–80 percent in loan markets and 30–85 percent in deposit markets).
- Riksbank actions in February 2009 included currency swap agreements:
  - With Latvia: the Riksbank to lend up to EUR 375 million.
  - With Estonia: the Riksbank to lend up to SEK 10 billion.
- Key exposure metrics (as of end‑2008):
  - Swedish banks’ equity and loan claims on their Baltic subsidiaries represented 8 percent of Swedish GDP.
  - Loans to subsidiaries amount to 35–45 percent of bank capital.
  - Reliance on operating profits from Baltic operations: 25 percent for Swedbank and nearly 10 percent for SEB.
- Risks and recommended regional approach:
  - Possible contagion from retreating from Baltic subsidiaries could damage parent franchise value and regional financial stability.
  - A coordinated regional contingency plan is needed to address (i) division of crisis management responsibility; (ii) methodology for evaluating bank asset quality and diagnosing viability; (iii) restructuring policies; and (iv) burden sharing agreements for liabilities of home and host fiscal authorities.

### Fiscal policy and framework
- Fiscal position and framework:
  - Sweden entered the downturn in robust fiscal health: debt was low and falling, and the fiscal rules framework has been consistently adhered to.
  - Sweden completed a full long‑term fiscal balance sheet exercise with strong results even under testing scenarios.
- Policy stance:
  - The authorities do not establish the case for discretionary fiscal activism beyond what is already planned (¶62).
  - Reasons:
    - Uncertainty over the level and path for potential output implies substantial range of uncertainty around estimates of the structural balance now and thus the consistency of the current stance with the fiscal rule (see Box 8).
    - Fiscal stabilizers appear to be large and fiscal multipliers appear to be small, as suggested by the 2‑country version of the IMF Global Integrated Monetary and Fiscal Model (GIMF).
    - Unclear public debt implications of any financial sector rescue operation, net of recoveries.
    - The composition of any stimulus matters.
- Budgetary impact (OECD 2005, using 2003 weight): Budgetary Impact of a 1 Percent Change in GDP (In percent of GDP)
  - Denmark 0.59
  - Finland 0.48
  - Sweden 0.55
  - Euro area average 0.48
  - France 0.53
  - Austria 0.47
  - Italy 0.53
  - Greece 0.47
  - Netherlands 0.53
  - Portugal 0.46
  - Norway 0.53
  - United Kingdom 0.45
  - Belgium 0.52
  - Spain 0.44
  - Germany 0.51
  - Ireland 0.38
- IMF staff GIMF estimates indicate small multipliers for Sweden for various stimulus options (1% public investment, 1% labor tax cut (permanent), 1% transfer to liquidity‑constrained households, 1% transfer to all households), with dynamic year profiles shown in staff estimates.

*Italic: IMF staff report content excerpt.*

### 45.      Given the absolute size of automatic stabilizers and multipliers, the potential burden

### _cr09247 - 45. Given the absolute size of automatic stabilizers and multipliers, the potential burden of the financial sector on public debt, and uncertainties about the structural balance, the scale of the authorities’ proposals for discretionary action in 2009–10 has merit. But it will strain efforts to remain compliant with the fiscal rule, and the composition of the discretionary stimulus raises some concerns.

### Fiscal stance, automatic stabilizers, and output gap uncertainty
- Automatic stabilizers plus discretionary measures generate large fiscal support: "6.6 percentage points of GDP in 2009, on staff estimates."
- Staff estimate for widening of the output gap in 2009: "7.2 percent."
- Staff model-based estimate of potential output volatility: "±1.1 percentage points of GDP a year."
- Wide range of potential GDP/output gap estimates implies uncertainty in assessing the underlying fiscal stance—"a range of nearly 3 percentage points of GDP for 2008."
- The full operation of automatic stabilizers accounts for "more than half of the deterioration in general government finances" in the 2009 context.

### Discretionary fiscal measures (2009–10) — composition and multipliers
- Total discretionary measures: "1.6 percent of GDP."
- Main components of the 2009 Budget Bill (Fall 2008) totaling "1.2" (percent of GDP):
  - Lower income tax: "0.5"
  - 1 percent cut in social contributions: "0.4"
  - CIT rate cut (from 28 to 26.3 percent): "0.2"
  - Lower taxes on pensions: "0.1"
  - Spending increase (education, R&D): "0.2"
  - Other 1/: "-0.2"
- Supplementary budget (January 2009): "0.3"
  - ALMPs: "0.1"
  - Infrastructure investment: "0.0"
  - Tax credits for home improvement: "0.1"
- 2009 Spring Fiscal Policy Bill (April 2009): "0.2 0.3"
  - Additional AMLPs: "0.2 0.3"
- Estimated multipliers:
  - Tax cut multiplier (income tax): "0.35"
  - Expenditure measures multiplier: "0.7"
- Staff view: many tax-side measures have small immediate aggregate demand impact given the lower multiplier.

### Fiscal balances, structural balance, and public debt projections
- Authorities’ projection: structural balance "projected to remain in surplus of at least 1 percent of GDP at all times through the projection period—consistent with the fiscal rule."
- Staff alternative assessment: larger deterioration in 2009 deficit "slightly above 4 percent of GDP" (staff view).
- Official projection of public debt: "rises to 46 percent of GDP in 2012" (authorities’ official projections referenced).
- Sweden: Staff baseline fiscal outlook (selected figures, percent of GDP):
  - Revenue 2009: "47.3"
  - Expenditure 2009: "51.4"
  - Overall balance 2009: "-4.1"
  - Structural balance 2009: "0.3"
  - Gross public debt 2009: "43.5"
  - Output Gap 2009: "-8.7"
- 2009 Spring Fiscal Policy Bill (selected figures, percent of GDP):
  - Revenue 2009: "52.1"
  - Expenditure 2009: "54.8"
  - Overall balance 2009: "-2.7"
  - Structural balance 2009: "1.2"
  - Gross public debt 2009: "43.4"
  - Output Gap 2009: "-7.2"

### Long-term sustainability and aging costs
- Projected increase in age-related spending (2007–60) per 2009 Aging Report: "2.6 percent of GDP" for Sweden versus "5.2 percent for Euro area countries."
- Staff public sector balance sheet approach: shows "positive net worth through 2060, albeit by a small margin."
- Policy concern: the fiscal rule requires cuts in nominal pensions in 2010 due to low recent returns; risk that "temporary" suspension of the rule could become permanent if repeated.
- Recommendation: adjust the pension formula to smooth paths only if "smoothing is symmetric and the formula remains unchanged thereafter."

### Expenditure ceiling framework and fiscal-rule compliance
- Established fiscal indicators (structural balance, 7-year rolling average, cumulative overall budget balance) "will malfunction" during the downturn and could "flash red" despite policy being on course.
- Recommendation: deemphasize these malfunctioning indicators and consider "an alternative means of showing adherence to the medium-term surplus target."
- Preserve "the nominal spending ceilings" as a firm commitment to avoid structural drift in spending.
- Requirement: any impact on net revenues from discretionary tax reforms must be offset by "an equal downward adjustments in expenditure ceilings."
- Role for the Fiscal Council: "could play a useful role in monitoring compliance with the letter and the spirit of these principles."
- Authorities: option under review (Attachment III; ¶63).

### Monetary policy, inflation, and inflation targeting
- Inflation target: "2 percent ±1 percent."
- Inflation developments:
  - Inflation has "fallen below the lower bound of the target."
  - Staff baseline forecast: "steady decline in inflation through most of 2009, followed by a return to a positive inflation—but still below the lower bound of target—by the middle of 2010."
- Real interest rates:
  - Real rates measured using headline inflation "have remained broadly unchanged" due to commodity price falls and mortgage interest effects.
  - Real rates measured relative to inflation expectations and core inflation "have, appropriately, fallen significantly."
- Monetary stance recommendation: "retained, for now."
- Repo rate outlook per authorities: repo rate expected to stay at "½ percent through 2009–10."
- Riksbank transparency: publishes policy committee minutes with two-week lag, a three-year inflation forecast and corresponding interest rate path; publication of individual votes has begun.

### Options for Quantitative Easing (Box 9)
- Outright purchase of assets:
  - Riksbank could increase purchase of government bonds at its own discretion to lower long-term yields.
  - Could assist frozen markets, such as mortgages, but consider "risks to the Riksbank’s balance sheet as well as an exit strategy" and potential need for government guarantee against financial losses.
- Usage of the NDO’s treasury functions:
  - NDO could increase issuance of treasury bills in exchange of frozen market securities to clarify monetary vs fiscal functions.
- Non-sterilization of foreign asset purchases by the central bank could be considered.
- Staff view: "case for further immediate steps into Quantitative Easing (QE) is not compelling" unless inflation expectations fall below target on a sustained basis; actions to support individual credit markets should remain under review.

### International reserves and financial-stability backstops
- Recent decision: raise international reserves by "SEK 100 billion—2 percent of total external debt."
- Stock of official reserves at end April 2009:
  - In billions of US dollar: "27.7"
  - In billions of SKr: "222.2"
  - In percent of total external debt: "4.5"
  - In months of imports of goods and services: "2.3"
- Skr 100 billion additional reserves (conversion): "In billons of US dollar (SKr 7.8289=$ 1) 12.8"
  - In percent of total external debt: "2.0"
  - In months of imports of goods and services: "1.0"
- Staff projection for end-2009 stock of official reserves: "38.1" (billions of US dollar) and "2.0" months of imports.
- Rationale: additional foreign currency resources may be required because "domestic and external bond amortization by large banks in 2009-10 is some four times larger than international reserves," and to support subsidiaries and host exchange rate regimes.

### Authorities’ views and policy stance
- Authorities’ assessment: Sweden’s prior policies (low inflation, current account and budget surpluses, low public debt, low unemployment, structural reforms) "have prepared Sweden well to face the global crisis."
- Spring Bill (April) projection for 2009: output to fall "some 4¼ percent in 2009."
- Fiscal policy stance: given commitment to fiscal sustainability, "no need is apparent now for further broad based discretionary fiscal stimulus," and the fiscal rule targeting "a 1 percent overall surplus over the cycle and respecting the three year expenditure ceilings" remains.
- On expenditure ceiling adjustment: authorities prefer "a continued thorough annual analysis of the budget balance" and remain cautious about changing a "long-established and credible anchor of the fiscal framework."
- Monetary policy preparation: unconventional options under consideration include "provision of 12 month fixed rate loans at the repo rate and the outright purchase of government bonds"; purchase of mortgage or corporate bonds seen as implying "undue credit risks."
- Exchange rate regime: "freely floating" will be maintained; increases in international reserves are warranted "on a pre-announced schedule, to address financial stability risks."

### Financial sector stabilization
- Policy measures: liquidity support, guarantee program, and other EU-consistent steps have helped stabilize markets, but "normal functioning has not resumed and the situation remains fragile."
- Bank stress tests: loan losses are expected to rise, but "banks will still meet the minimum regulatory capital requirements even under the most stressed scenarios."

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### 67.      The recent bank resolution law empowers the government to take over failing banks,

### _cr09247 - 67.      The recent bank resolution law empowers the government to take over failing banks,

### Bank resolution law and legal review
- The recent bank resolution law empowers the government to take over failing banks.
- Shareholders have recourse to the Examination Board of three judges strictly limited to examine the appropriateness of the conditions—the takeover itself is not subject to review by the Examination Board or any other legal authority.
- Government actions will be guided by need to safeguard the legitimate interests of taxpayers (¶39–41).

### Recapitalization and support for banks
- As credit losses become clearer, banks may have to raise capital to fill the shortfalls over time.
- If needed, banks will be recapitalized through government capital injections of common stock.
- Swedish banks have made commitments to continue to support their subsidiaries with liquidity and capital.
- The measures that the government has adopted have not been ring-fenced and have thus been able to benefit entire banking groups.
- Since the outbreak of the crisis, the authorities have continuously been involved in a dialogue with the major Swedish banks.

### Key macroeconomic indicators (selected, exact values preserved)
- Real GDP: 2004 4.1; 2005 3.3; 2006 4.2; 2007 2.6; 2008 -0.2; 2009 -6.0; 2010 0.0
- Domestic Demand: 2004 2.0; 2005 3.2; 2006 3.9; 2007 4.1; 2008 0.2; 2009 -3.9; 2010 -0.4
- CPI inflation: 2004 1.0; 2005 0.8; 2006 1.5; 2007 1.7; 2008 3.3; 2009 1.8; 2010 2.1
- Unemployment rate (in percent): 2004 6.3; 2005 7.6; 2006 7.0; 2007 6.1; 2008 6.2; 2009 9.2; 2010 10.2
- Gross national saving (percent of GDP): 2004 23.1; 2005 24.2; 2006 26.8; 2007 28.3; 2008 27.4; 2009 23.1; 2010 22.6
- Gross domestic investment (percent of GDP): 2004 16.8; 2005 17.7; 2006 18.5; 2007 19.4; 2008 20.0; 2009 18.9; 2010 18.6
- Potential Real GDP: 2004 2.8; 2005 3.4; 2006 3.5; 2007 2.3; 2008 2.3; 2009 1.5; 2010 1.2
- Output Gap (as a percent of potential): 2004 0.0; 2005 -0.1; 2006 0.6; 2007 0.9; 2008 -1.5; 2009 -8.7; 2010 -9.8
- General government balance (in percent of GDP): 2004 0.6; 2005 2.0; 2006 2.4; 2007 3.8; 2008 2.5; 2009 -4.1; 2010 -5.2
- Total Revenues (in percent of GDP): 2004 53.3; 2005 54.5; 2006 53.8; 2007 53.6; 2008 52.9; 2009 47.3; 2010 46.5
- Total Expenditures (in percent of GDP): 2004 52.7; 2005 52.5; 2006 51.4; 2007 49.8; 2008 50.3; 2009 51.4; 2010 51.7
- Structural balance (as a percent of potential GDP): 2004 0.4; 2005 1.2; 2006 1.3; 2007 1.9; 2008 2.5; 2009 0.3; 2010 0.0
- General government gross debt (percent of GDP): 2004 51.2; 2005 51.0; 2006 45.9; 2007 40.5; 2008 38.0; 2009 43.5; 2010 49.2
- Current account (percent of GDP): 2004 6.7; 2005 7.0; 2006 8.6; 2007 8.6; 2008 7.8; 2009 5.0; 2010 4.6
- Trade balance (percent of GDP): 2004 8.1; 2005 7.8; 2006 7.9; 2007 7.3; 2008 7.4; 2009 7.1; 2010 6.5
- International reserves (in billions of US dollars) 1/: 2004 22.4; 2005 26.4; 2006 28.2; 2007 30.5; 2008 30.3; 2009 38.1; 2010 38.9
- Reserve cover (months of imports of goods and services): 2004 2.0; 2005 2.1; 2006 2.0; 2007 1.8; 2008 1.6; 2009 2.0; 2010 2.0
- GDP per capita (in current PPP US dollars, 2006): 31,062
- Income Distribution (ratio of income received by top and bottom quintiles, 2005): 3.3
- Life expectancy at birth (2005): 78.4 (males) and 82.9 (female)
- Automobile ownership (2004): 456 per thousand
- CO2 Emissions (tonnes per capita, 2003): 5.6
- Population Density (inhabitants per sq. km., 2005): 22
- Poverty Rate (share of the population below the established risk-of-poverty line, 2005): 9%

### Medium-term projections (selected exact figures from staff projections)
- Real GDP: 2007 2.6; 2008 -0.2; 2009 -6.0; 2010 0.0; 2011 1.8; 2012 3.8; 2013 4.4; 2014 4.5
- Unemployment rate: 2007 6.1; 2008 6.2; 2009 9.2; 2010 10.2; 2011 9.9; 2012 9.3; 2013 8.8; 2014 7.9
- Output gap (percent of potential): 2007 0.9; 2008 -1.5; 2009 -8.7; 2010 -9.8; 2011 -9.4; 2012 -7.1; 2013 -4.2; 2014 -1.3
- Inflation (annual average, percent): 2007 1.7; 2008 3.3; 2009 1.8; 2010 2.1; 2011 2.1; 2012 2.0; 2013 2.0; 2014 2.0
- Current account (in percent of nominal GDP): 2007 8.6; 2008 7.8; 2009 5.0; 2010 4.6; 2011 4.7; 2012 4.1; 2013 4.4; 2014 4.6

### Financial system structure and soundness (selected exact figures)
- Total financial system assets (in millions/SEK and percent of GDP): 2002 total assets 9,186,817 (100.0; 379.5 percent of GDP); 2006 13,589,727 (100.0; 468.5 percent of GDP); 2007 14,952,386 (100.0; 488.0 percent of GDP); 2008 16,893,874 (100.0; 535.1 percent of GDP)
- Total banking sector (memorandum): 2002 1,162.0; 2006 6,838,534 (74.4; 282.5); 2007 9,648,729 (71.0; 332.6); 2008 10,823,268 (72.4; 353.3); 2009 13,243,415 (78.4; 419.5)
- Four major banks (total top four banks total assets): 2002 5,760,842 (62.7; 238.0 percent of GDP); 2006 8,213,115 (60.4; 283.1); 2007 9,491,189 (63.5; 309.8); 2008 11,665,716 (69.1; 369.5)
- Regulatory capital to risk-weighted assets (banks, end-period): 2003 10.5; 2004 10.6; 2005 10.5; 2006 10.5; 2007 10.2; 2008 10.7
- Regulatory Tier I capital to risk-weighted assets: 2003 8.0; 2004 8.3; 2005 7.7; 2006 7.8; 2007 7.5; 2008 8.1
- Nonperforming loans to total gross loans: 2003 2.0; 2004 1.2; 2005 0.9; 2006 0.8; 2007 0.6; 2008 1.1
- Loan-loss provisions to nonperforming loans: 2003 49.4; 2004 66.2; 2005 69.7; 2006 56.1; 2007 58.3; 2008 49.1
- Return on assets (net income as percent of average total assets): 2003 0.6; 2004 0.7; 2005 0.8; 2006 0.8; 2007 0.8; 2008 0.5
- Liquid assets as percent of total assets: 2003 4.4; 2004 5.2; 2005 5.0; 2006 5.0; 2007 5.0; 2008 4.0
- Customer deposits as a percent of total (non-interbank) loans: 2003 50.6; 2004 52.6; 2005 50.2; 2006 53.8; 2007 51.4; 2008 46.1
- Noninterbank loans to noninterbank deposits: 2003 142.6; 2004 130.8; 2005 137.4; 2006 135.7; 2007 139.8; 2008 139.6

### Non-bank financial indicators (selected exact figures)
- Household financial liabilities as percent of GDP: 2003 58.9; 2004 61.8; 2005 65.9; 2006 69.0; 2007 71.6; 2008 75.1
- Total debt stock as percent of GDP (memorandum): 2003 75.4; 2004 71.5; 2005 73.6; 2006 72.0; 2007 82.2; 2008 94.5
- OM Stockholm Stock Exchange Index (annual percent change): 2003 29.2; 2004 16.0; 2005 30.5; 2006 18.7; 2007 -5.7; 2008 -39.2
- Real estate markets (one- or two dwelling buildings, year on year percent change): 2003 6.6; 2004 9.6; 2005 9.6; 2006 11.4; 2007 10.7; 2008 2.9

### Public finance projections and balance-sheet highlights
- Total Revenue (SEK billions): 2007 1,642; 2008 1,669; 2009 1,440; 2010 1,403; 2011 1,455; 2012 1,582; 2013 1,736; 2014 1,901
- Total Expenditure (SEK billions): 2007 1,526; 2008 1,589; 2009 1,565; 2010 1,559; 2011 1,616; 2012 1,709; 2013 1,809; 2014 1,916
- Overall Balance (SEK billions): 2007 116; 2008 80; 2009 -125; 2010 -156; 2011 -161; 2012 -127; 2013 -73; 2014 -16
- Overall Balance (percent of GDP): 2007 3.8; 2008 2.5; 2009 -4.1; 2010 -5.2; 2011 -5.1; 2012 -3.8; 2013 -2.1; 2014 -0.4
- Gross Public Debt (percent of GDP) (memorandum): 2007 40.5; 2008 38.0; 2009 43.5; 2010 49.2

### Identified policy priorities implicit in the text
- Ensure recapitalization of banks as credit losses crystallize, using government capital injections of common stock if needed.
- Maintain continuous dialogue between authorities and major banks to coordinate support for subsidiaries’ liquidity and capital.
- Apply government measures across entire banking groups (not ring-fenced) where appropriate to maximize systemic benefit.
- Guide future interventions by safeguarding the legitimate interests of taxpayers.

*Source: _cr09247 - 67.      The recent bank resolution law empowers the government to take over failing banks,*

### 1.      Sweden’s exposure to the global business cycle—as measured by both, trade and

### Sweden’s exposure to the global business cycle—as measured by both, trade and

### Overview
- Sweden’s exposure to the global business cycle—as measured by both, trade and financial linkages—has increased substantially over the last two decades, with a marked acceleration in this process during the recent boom.
- Activity related to exports contributed, on average, over 35 percent of economic growth since 1990, a substantial increase compared to the 1980s.
- Sweden’s export basket is dominated by goods and services characterized by cyclically sensitive demand.

### Trade linkages and export composition
- Growth in volume of trade, 1985–present (percentage of GDP; constant prices unless stated):
  - Exports: 1985: 25.5; 1990: 26.3; 1995: 35.8; 2000: 46.6; 2005: 51.6; 2008: 56.7
  - Imports: 1985: 25.1; 1990: 28.1; 1995: 31.4; 2000: 40.3; 2005: 40.8; 2008: 46.8
  - Net exports (contribution to real GDP growth): 1985: 2/-1.6; 1990: 0.3; 1995: 1.6; 2000: 0.6; 2005: 0.6; 2008: -0.3
  - Real GDP (annual percentage change): 1985: 3/2.2; 1990: 1.0; 1995: 4.0; 2000: 4.4; 2005: 3.3; 2008: -0.2
- Sweden: Key export sectors, 1990–99 vs 2000–08 (in percent of total exports):
  - Food and agricultural products: 1990–99: 6.1; 2000–08: 5.5
  - Consumables, excluding durables and food: 1990–99: 0.3; 2000–08: 0.3
  - Consumer durables: 1990–99: 8.0; 2000–08: 8.3
  - Household equipment, including furniture: 1990–99: 3.7; 2000–08: 3.2
  - Chemicals and fertilizers: 1990–99: 7.0; 2000–08: 8.2
  - Intermediate capital goods: 1990–99: 17.7; 2000–08: 14.7
  - Electronic equipments and machinery: 1990–99: 37.9; 2000–08: 35.9
  - Financial Services: 1990–99: 0.4; 2000–08: 0.7
  - Travel: 1990–99: 3.6; 2000–08: 4.2
  - Computer and information services: 1990–99: 0.6; 2000–08: 1.7
  - Other business services: 1990–99: 5.2; 2000–08: 8.9
- Direction of exports (percent of total nominal value of annual exports), selected aggregates and partners (1990–2007 series shown in text):
  - Industrial countries: 1990: 86.4; 1995: 80.4; 2000: 79.9; 2004: 79.5; 2005: 79.0; 2006: 77.8; 2007: 77.8
  - United States: 1990: 9.6; 1995: 7.9; 2000: 10.2; 2004: 11.5; 2005: 10.7; 2006: 10.5; 2007: 9.2
  - European Union: 1990: 60.5; 1995: 59.7; 2000: 59.6; 2004: 57.9; 2005: 58.3; 2006: 58.4; 2007: 59.4
  - Euroarea: 1990: 48.9; 1995: 41.0; 2000: 40.4; 2004: 39.3; 2005: 39.4; 2006: 38.8; 2007: 39.6
  - Nordic countries: 1990: 23.2; 1995: 19.0; 2000: 18.7; 2004: 20.7; 2005: 21.0; 2006: 21.4; 2007: 22.6
  - Baltic countries: 1990: 0.0; 1995: 0.7; 2000: 1.0; 2004: 1.4; 2005: 1.2; 2006: 1.2; 2007: 1.6

### Financial linkages and income / wealth dependence
- Over the last decade, development of global and EU capital markets and recovery of Sweden’s banking sector since the mid-1990s resulted in large financial flows into and out of Sweden.
- Swedish banks and larger NFCs increased borrowing from international capital markets; overseas assets held by Swedish institutions increased substantially.
- Investment of financial capital into the Baltic region increased systematically over the last decade, particularly since 2005; resulting income flows bolstered the current account and national income during the recent boom.
- Selected financial ratios (percent of nominal GDP or percentage points):
  - External assets-to-nominal GDP: 1998: 118.0; 2000: 163.7; 2004: 174.1; 2008: 254.3
  - External liabilities-to-nominal GDP: 1998: 155.2; 2000: 198.8; 2004: 198.5; 2008: 259.2
  - Net factor income-to-current account: 1998: -33.7; 2000: -14.3; 2004: -1.6; 2008: 27.6
  - Net factor income-to-nominal GDP: 1998: -1.3; 2000: -0.6; 2004: -0.1; 2008: 2.3

### Spillover channels and VAR analysis
- Objective: quantify the trade and output impact on Sweden of cyclical fluctuations in its major trading partners using alternate VAR models.
- Identified channels (three main channels):
  - Trade Channel: direct impact on Swedish exports due to shocks to domestic demand in key trading partners (Euroarea, Nordic countries, U.S., emerging Europe, particularly the Baltic countries).
  - Investment Channel: directly via cost of capital in international financial markets where major Swedish firms borrow (e.g., cost of equity proxied by global stock indexes such as the NASDAQ composite), and key input costs (e.g., oil prices); indirectly via movement in exports affecting investment.
  - Consumption Channel: via the income channel (depressed exports and investment leading to reductions in wage growth or layoffs) and the wealth channel (equity and bond wealth affected by global and regional equity cycles and debt spreads).
- Hypothesis: Swedish GDP is statistically associated with GDP in the U.S., the Eurozone, Nordic-Baltic trading partners, global equity indexes (proxied by NASDAQ composite) (positively), and with oil prices, domestic credit market conditions, and unemployment (negatively).
- VAR results summary:
  - Specification included in reverse order: Swedish GDP; domestic unemployment and basis spread; Baltic GDP; Nordic GDP; Eurozone GDP; U.S. GDP.
  - Impulse responses of Swedish GDP to innovations in U.S. and Eurozone GDP and domestic credit spreads are consistently of the expected sign, quantitatively large and persistent.
  - Example: a one percentage point increase in U.S. and Euroarea GDP growth is associated with as much as 3/5 and ¾ percentage point rise in Swedish GDP over four quarters.
  - For some covariates (e.g., domestic unemployment), impulse responses sensitive to specification (in-levels vs rates-of-change); for others (e.g., oil prices, Nordic-Baltic GDP), responses consistently quantitatively negligible.
  - However, impulse responses are statistically insignificant for almost all specifications, likely reflective of the small sample size that begins in the 1990s (1995Q1–2008Q4).
- Synchronization:
  - Visual examination indicates a high degree of synchronization of business cycles between Sweden, US, and Euroarea; Swedish growth comoves with Euroarea, both following U.S. dynamics.

### Trade, domestic demand, and other empirical findings
- Trade:
  - Impulse response analysis suggests strong and persistent positive association between the level of Swedish exports and level of retail sales in the U.S., the Eurozone, and the Nordic countries.
  - Impulse responses of Swedish exports to innovations in domestic fixed investment in the Eurozone and the US are quantitatively large but statistically insignificant.
  - Strong response of Swedish exports to Nordic retail sales—uncorrected for U.S. consumption cycle—together with absence of corresponding Swedish GDP response to idiosyncratic Nordic volatility indicates trade effect may reflect global interlinkages rather than a Nordic–Swedish linkage per se.
- Domestic demand:
  - Formal statistical analysis revealed absence of robustness of estimated impulse responses of both consumption and investment to innovations in the covariates.
  - Impulse responses of Swedish consumption and investment indicate no significant direct impact of any of the external covariates.

### Attachment II — Have the right lessons been learned from the banking crisis of the 1990s?
A. The roots of the early 1990s banking crisis
- Drivers:
  - Financial market deregulation in the 1980s spurred a lending boom; pro-cyclicality in macroeconomic policy; fixed exchange regime aggravated vulnerabilities.
  - Financial liberalization lifted credit constraints, leading to major boost in bank lending; banks focused on market share rather than profitability; weaknesses in risk management, governance, and internal controls.
  - Bank supervision lacked authority and capacity; supervisory frameworks were unprepared for deregulated markets.
  - Deregulation led to a real estate bubble in the late 1980s, further fueling credit expansion via increased collateral values.
  - Under fixed exchange rate regime, monetary policy options were limited; expansionary macro policy led to higher inflation by early 1990; real exchange rate trended upward.
- Crisis sequence:
  - 1990: boom ended; global interest rates rose after German reunification; domestic recession began; real estate prices fell; speculative attacks on the Krona; monetary policy sharply tightened.
  - 1990–1992: financial companies and banks began to face difficulties; Nordbanken and Första Sparbanken announced problems meeting prudential capital requirements; government injected capital and provided loan guarantees.
  - By mid-1992: volatility in foreign exchange and money markets heightened; increased numbers of banks and mortgage companies faced difficulties; international capital markets were effectively shut down for Swedish banks and firms.
- Appendix II Box 1: Major events (selected):
  - 1990: Gamlestaden taken over by Nordbanken.
  - 1991: Government subscribed SKr 4.2 billion (½ percent of GDP) of Nordbanken’s new share issue (SKr 5.1 billion).
  - 1992: Government bought all outstanding shares of Nordbanken (SKr 2.1 billion); Nordbanken’s bad assets transferred to asset management company Securum AB; government announced intention to grant a general state guarantee covering all Swedish-chartered banks and their foreign subsidiaries; government approved bill “Measures for Strengthening the Financial System”; Gota AB declared bankrupt; government nationalized Gota Bank.
  - 1993: Government took over Securum AB; BSA established asset management company Retriva for Gota Bank bad assets; SEB and Swedbank applied for support then withdrew applications after announcing capital raises; government offered capital adequacy protection to Förningsbanken.
  - 1996: Parliament approved bill “Ending the Bank Support,” officially declaring the end of the banking crisis.

B. “Swedish Model” — banking crisis resolution policies
- Key resolution measures:
  - The Bank Support Authority (BSA): new agency separate from MOF, Riksbank, and FSA to avoid capacity constraints and conflicts of interest; parliament gave BSA an open-ended budget for rescue operations; implementation largely left to technocrats.
  - Upfront recognition of expected losses: chosen approach—rapid evaluation of financial conditions over a three-to five-year horizon (de facto stress test) to estimate capital shortages—aimed to restore confidence quickly.
  - Bank classification: based on stress tests, banks grouped into Category A (regulatory capital adequacy ratio above eight percent), Category B (could temporarily fall below eight percent), and Category C (nonviable banks to be resolved).
  - Bad bank strategy: government took control of a Category C bank (Gota Bank) and split assets into good and bad; valuation assisted by the Valuation Board, purposefully erring on the side of undervaluation to set floor prices and maintain market liquidity; bad assets transferred to an asset management company established for each troubled bank; bad-bank approach considered most cost efficient because it allowed specialization in associated tasks.

*Prepared by Jay Surti; Attachment II prepared by Kotaro Ishi.*

### 5.      In sum, the essence of the Swedish model was its comprehensive and systematic

### _cr09247 - 5.      In sum, the essence of the Swedish model was its comprehensive and systematic

### Essence of the Swedish model
- Sweden legislated a special bank resolution bill that:
  - gave authorities power to evaluate the financial condition of troubled banks in a forward looking manner,
  - enabled forcing bank shareholders to recapitalize banks,
  - allowed authorities, if necessary, to take control, including nationalization.
- Parliament authorized the BSA to provide an unlimited guarantee to the banking system.
- Political influence in individual bank workouts was successfully held at arm’s length.
- The essence of the model is characterized as comprehensive and systematic.

### Timeline and resolution outcomes
- Initial signs of financial system strain: Autumn 1990.
- Passage of the bank resolution bill: end of 1992.
- Confidence began recovering: as soon as early 1993.
- July 1996: government announced the end of the banking crisis; annulled the 1992 bank resolution bill, removed the blanket guarantee, and dissolved the BSA (transformed to the Deposit Guarantee Board).
- Four major banks availed themselves of the government rescue package; most assistance concentrated in two: Nordbanken and Gota Bank, and their associated asset management companies (Securum and Retriva).
- Only one bank, Gota Bank, was nationalized. Nordbanken was already partially government-owned prior to the crisis.

### Fiscal commitments, payments, and outcomes
- Government’s total commitment: SKr 88 billion (5 percent of GDP).
- Total budgetary costs of rescue measures (paid out): SKr 65 billion (4 percent of GDP).
- Much of the costs were later recovered through dividend payments, privatization receipts, and sales of bad assets at prices higher than anticipated.
- Table totals (Sweden: Government funds used in rescue operations):
  - Commitment: 84,555 (In millions of kronor)
  - Paid out: 65,305 (In millions of kronor)
  - Charged to the State's budget: 60,505 (In millions of kronor)
- Note: GDP is an average for 1993-96.

### Banking sector performance and asset management
- Nonperforming loans peaked at 13 percent of total loans in Sweden (compared to an average of 25 percent for a sample of 42 crisis episodes).
- Bad bank strategy:
  - Effective for recovery of bad assets due to relatively homogeneous assets (mainly bank loans related to commercial property development and residential mortgages).
  - Amount of bad assets transferred was carefully calibrated to ensure a level playing field between troubled (Category C) banks and healthier banks.
  - Immediate sale of bad assets was considered more costly due to fire-sale risks and lack of securitization markets at the time.
- Transparency and upfront recognition of loan losses, based on cautious assessments by expert auditors, helped allay market concerns and restore confidence.
- Credit volumes dropped sharply during the resolution period; bank lending did not recover until the middle of 1995.

### Macroeconomic context and interactions with bank resolution
- Fear of a twin crisis in mid 1992 prompted comprehensive macroeconomic adjustment beyond banking-sector measures.
- Following the abandonment of the fixed exchange regime, the Krona depreciated more than 30 percent in 1993.
- Monetary policy was eased and interest rates fell, supporting aggregate demand.
- Fiscal consolidation measures included tighter rules on transfers to households, increases in income taxes, social security fees, and employee payroll taxes aimed at achieving fiscal balance.
- Sweden benefited from a global economic recovery around 1992-93; exchange rate depreciation improved external competitiveness; exports rebounded in early 1993 and GDP growth resumed from mid-1993.
- Suggestion in the text: economic recovery helped banking resolution, rather than bank resolution driving recovery.

### Key lessons and policy implications
- Timing and diagnosis:
  - Determination of the appropriate lapse of time before decisive corrective action requires balancing not letting difficulties fester with allowing adequate time for diagnosis and preparation.
  - Two years elapsed before decisive action in Sweden; in retrospect intervention was timely enough to contain the crisis.
- Blanket guarantees:
  - Can bridge time between diagnosis and action when credible.
  - Credibility requires strong fiscal backing, political will, and an exit strategy to avoid undue delay in corrective action.
- Liquidity provision:
  - Can preserve stability but may impede consensus on corrective measures.
  - Sweden tied bank restructuring to macroeconomic policy shifts, helping mobilize political will.
- Context matters:
  - The modest scale of underlying credit losses in Sweden made a bold and transparent strategy more feasible.
  - Where underlying losses are much greater, decisive and transparent intervention is more challenging.
- Asset valuation and stress testing:
  - Sweden’s purposeful low-pricing of bad assets helped identify capital shortages and drive recapitalization efforts.
  - Contemporary stress testing often reports central estimates rather than lower-tail (one or two standard deviations below central) loss scenarios, which may hold back capital-raising efforts.
- Macro-first implication:
  - Macroeconomic policies (including depreciation) may have been largely responsible for the Swedish success; addressing macroeconomic imbalances may be necessary before financial-sector measures can be fully effective.
- Institutional memory and reform:
  - Abolishing the special bank resolution framework after the crisis left Sweden unprepared for strains emerging after Fall 2007.
  - Identified weaknesses in the regulatory framework remained despite official reviews.
  - Political focus tends to move away from crisis lessons as the crisis eases; this implies corrective actions for long-run financial-stability weaknesses should be taken immediately, even while containing the immediate crisis.
  - Points to an urgent need to reform resourcing arrangements for the supervisor in Sweden.
- Final caution:
  - The 1990s Swedish case suggests “never again” is unrealistic — banking and financial crises will recur.

### Key statistics and indicators (as presented)
- Nonperforming loans peak in Sweden: 13 percent of total loans.
- Sample average nonperforming loans (Laevan and Valencia, 2008): 25 percent.
- Government commitment: SKr 88 billion (5 percent of GDP).
- Government budgetary costs (paid out): SKr 65 billion (4 percent of GDP).
- Table aggregates (In millions of kronor): Commitment 84,555; Paid out 65,305; Charged to State's budget 60,505.
- Krona depreciation: more than 30 percent in 1993.
- Timeline markers:
  - Autumn 1990: initial strain signs.
  - End-1992: bank resolution bill enacted (vertical bar indicator in Appendix II Figure 2: December 1992).
  - Early 1993: confidence recovering; Swedbank and SEB discussions with BSA.
  - Middle of 1993: GDP growth resumed.
  - Middle of 1995: bank lending recovery begins.
  - July 1996: government announces end of banking crisis.

*Source: _cr09247 - 5.      In sum, the essence of the Swedish model was its comprehensive and systematic*

### 2.      To avoid problems in precisely dating business cycles (especially ex-ante), the

### To avoid problems in precisely dating business cycles (especially ex-ante), the

### Indicators adopted to assess budget performance
- Three indicators used by Swedish authorities:
  - (i) the average overall budget balance since 2000.
  - (ii) a seven-year rolling average of the overall budget balance centered on the current year.
  - (iii) the structural overall budget balance, the budget balance adjusted for cyclical and other one-off and temporary effects.

### Recent fiscal performance and determinants
- Overall budget balance has consistently been in surplus excluding 2002 and 2003.
- Public debt declined from 65 percent of GDP in 1999 to 38 percent of GDP in 2008.
- Strong fiscal performance achieved primarily through expenditure reduction rather than higher taxes.
- Contributing factors:
  - Lower social transfers due to tightened criteria for sickness and disability payments.
  - Lower interest payments.
  - Nominal expenditure ceilings (introduced in 1997) consistently met.

### Model simulations of the fiscal rule
- Model framework:
  - Two-country “New Keynesian” model with rational expectations.
  - Estimated for 1993Q1-2008Q4 with Bayesian estimates of the parameters.
  - Each set: 1500 simulations lasting 200 quarters; subject to various dynamic stochastic shocks.
- Key simulation results:
  - Under full operation of automatic stabilizers with no discretionary policy:
    - The 1 percent of GDP fiscal surplus target is met on average over the business cycle.
    - 95 percent of the time the cumulative debt at the end of each cycle would be within ±4 percentage points of GDP of the debt level consistent with attaining the target precisely over each cycle.
    - Caveat: small deviations each cycle could cumulate, risking substantial deviation from sustainable debt-to-GDP levels.
  - Seven-year rolling average indicator:
    - Model suggests average business cycle length in Sweden close to 7 years.
    - Under automatic stabilizers only:
      - 95 percent of the time the indicator is within ±0.5 percent of GDP with 0 average.
      - Cumulative debt at the end of each simulation (50 years ahead) would be within ±8 percentage points of GDP of the debt level consistent with attaining the target precisely over the simulation period.
  - Discretionary safety margin:
    - Introducing a small discretionary fiscal adjustment of ½ percent of GDP when the economy is above trend and expected to remain so for three years:
      - On average the level of debt is 8 percentage points lower at the end of the simulations, eliminating the concern of a debt drift.

### The fiscal rule and the current economic downturn (tail event)
- Historical 95 percent confidence interval for Sweden’s output gap: ±3½ percent.
- Staff projects the output gap during the current downturn will reach and remain large at about 9 percent for the next few years.
- Implications:
  - Even allowing automatic stabilizers to operate, both the cumulative average surplus and the 7-year rolling average indicators are expected to deviate substantially from the target over the next 5 years.
  - Uncertainties in output gap estimates make structural budget balance estimates unreliable.
  - Attempting to meet the fiscal rule now could be highly procyclical.

### Appropriate fiscal policy (analysis and risks)
- Automatic stabilizers are relatively large in Sweden:
  - OECD (2005) semi-elasticity: 0.55 for Sweden (OECD average 0.44; Euro area average 0.48).
  - Flodén (2009) estimates including ALMPs and recent policy: automatic stabilizers broadly unchanged at 0.62.
- Fiscal multipliers are small:
  - IMF two-country GIMF estimates: temporary 1 percent of GDP increase in government investment boosts output by 0.7 percent in Sweden (compared with 1.2 percent for the United States).
  - A 1 percent of GDP permanent reduction in labor income taxes would boost output by 0.35 percent in the first year.
  - A temporary 1 percent increase in public investment in the rest of the world boosts Sweden’s output by 0.6.
- Policy conclusions:
  - With large stabilizers and small multipliers, the case for discretionary fiscal action is attenuated.
  - Long-term sustainability concerns and contingent liabilities in the banking sector counsel caution.
- Specific risk factors cited:
  - Unclear outlook for productivity growth and potential output → substantial uncertainty around structural balance estimates.
  - Political difficulty in adjusting pensions under Sweden’s defined-contribution, pay-as-you-go plan → concern about pension fund sustainability.
  - Considerable contingent liabilities from explicit and implicit guarantees to the banking system, especially from banks’ exposures in the Baltics → reason to “keep the fiscal powder dry.”
- Review of surplus target:
  - Once uncertainty over growth potential and cyclical position is reduced, the surplus target will need review to ensure long-term sustainability.

### Appropriate monitoring and fiscal framework adjustments
- Short-term priority: prevent significant deterioration in underlying fiscal position when measurement is difficult and indicators may misstate the position.
- Options and guidance:
  - Retain the expenditure ceiling to prevent fiscal drift; any discretionary tax cuts should be offset by equal downward adjustments in the expenditure ceilings.
  - Use the expenditure ceiling as a “guideline” rather than a strict limit to avoid impeding automatic stabilizers if the recession is worse or more protracted than envisaged.
    - Risk: ceiling covers only central government spending, creating incentives to cut transfers to local governments (which must run balanced budgets), potentially compounding procyclicality.
    - If ceiling is softened, any important deviation should be transparently accounted for.
    - If breach of the ceiling risks seriously undermining fiscal framework credibility, there may be a case for strictly observing the ceilings.
  - The Fiscal Council could play a useful role in publicly monitoring compliance with the letter and spirit of the fiscal framework.

### Attachment IV: Fiscal sustainability — Baseline scenario and risks
- Baseline scenario:
  - Underlying fiscal position projected to improve slightly over the medium-term to about ¼ percent of GDP reflecting recent reforms to reduce welfare expenditures.
  - After cyclical downturns expected for 2009-2011, public debt-to-GDP ratio declines from 53.4 percent of GDP in 2012 to 49.4 percent of GDP in 2014.
  - Primary surplus of about 1½ percent of GDP in 2014; fiscal position expected to remain strong.
- Contextual points:
  - Public debt was 38 percent of GDP in 2008.
  - Portion of government liabilities denominated in foreign currencies: 20 percent share.
- Alternative scenario shocks (impacts relative to baseline):
  - External risks:
    - Permanent ½ standard-deviation shock to the interest rate: 0.7 percentage point increase from the baseline → public debt increases by 2 percentage points to 51 percent of GDP in 2014.
    - One-time 30 percent depreciation in the REER (in 2010) → immediately increases public debt to 53.2 percent of GDP; debt subsequently falls to 53.2 percent of GDP in 2014 under baseline pace.
    - One-time 10 percent of GDP shock to contingent liabilities (in 2010) → public debt increases to 55.2 percent of GDP; assuming baseline speed of debt reduction thereafter, public debt would lower to 58.7 percent of GDP in 2014 (about 10 percent of GDP higher than the baseline).
  - Domestic risks:
    - ½ standard deviation shock to primary balance (lowers primary balance by nearly 1 percent of GDP each year) → debt in 2014 higher by 4½ percentage points of GDP (to 54 percent of GDP) relative to baseline.
    - ½ standard deviation shock to growth (brings average projected annual growth down by 0.8 percent) → public debt rises to 57 percent of GDP in 2014.
    - One-quarter standard deviation shocks to growth, real interest rate, and primary balance (lowering output growth by 0.4 percent a year, raising real interest rate by 0.35 percent a year, and reducing the primary balance by ½ percent of GDP a year) → public debt to 53.4 percent of GDP in 2014 (increase of 4 percentage points from baseline).
  - Combined/confluence of shocks:
    - A confluence of lower growth, higher real interest rates and weaker primary balance would pose threats but the impact would remain modest at about 4 percent of GDP (relative to baseline).
- Public sector balance sheet and long-run sustainability:
  - Projected increase in spending with aging: 2.6 percent of GDP (compared to 5.2 percent in the euro area).
  - Public sector balance sheet approach on staff baseline scenario suggests the net worth constraint continues to be met by 2060, albeit with a smaller margin to absorb upside risks to aging costs.

*Prepared by IMF staff (Staff Report for the 2009 Article IV Consultation – Informational Annex).*

### 1.      This statement contains information that has become available since the Staff Report

### _cr09247 - 1.      This statement contains information that has become available since the Staff Report

### Update since the Staff Report
- This statement contains information that has become available since the Staff Report was circulated to the Executive Board on June 30, 2009. This information does not alter the staff’s board assessment of policy issues and recommendations contained in the staff report.

### Recent economic indicators and outlook
- Euro values for merchandise exports and imports, as well as industrial production, fell 33, 35, and 22 percent respectively in the twelve months to May.
- Data on new foreign and domestic orders appear to have stopped falling, though they remain at a low ebb.
- The Riksbank revised its baseline forecast (since April) and now projects a 5.4 percent reduction in real GDP in 2009—about 1 percentage point weaker than in April—attributing the weaker outcome to lower domestic demand and weaker anticipated recovery in key export markets.
- The Riksbank forecasts that the repo rate will remain at 0.25 percent until the autumn of 2010.

### Riksbank policy actions
- The Riksbank lowered its policy rate by 0.25 percentage points to 0.25 percent on July 1. As a result, bank deposits at the Riksbank now earn a modestly negative nominal interest rate.
- The Riksbank provided up to SEK 100 billion in fixed rate loans to banks at a 12 month maturity. The associated auction on July 13 was oversubscribed with the rate set at a premium of 20 basis points over the policy rate.
- The Riksbank has imposed a penalty on banks’ excess reserves at the Riksbank’s deposit facility (noted elsewhere in the document).

### IMF Executive Board conclusion and assessment (PIN No. 09/102, August 7, 2009)
- On July 22, 2009 the Executive Board concluded the 2009 Article IV consultation with Sweden.
- Background findings:
  - Two Swedish banks built up large exposures in the Baltics, significantly increasing loan losses beyond normal recessionary levels.
  - Liquidity pressures emerged due to dysfunctional wholesale funding markets; extensive public guarantees only partly mitigated market unease about capital adequacy.
  - Sweden’s output composition (investment goods and consumer durables) made it particularly vulnerable to the global recession; exports turned sharply negative in Q4 2008.
  - The Swedish krona depreciated substantially; staff views this as probably resulting in only a modest undervaluation.
- Policy response recognized as wide-ranging and timely:
  - Expansion of Riksbank lending facilities (lengthened maturities, fixed rates, extended eligible collateral).
  - Expanded deposit and credit guarantees.
  - New bank recapitalization scheme.
  - Decisive monetary easing to a policy rate of ¼ percent and imposition of a penalty on banks’ excess reserves.
  - Fiscal loosening for 2009, taking the budget from a surplus of 2½ percent in 2008 to a deficit of 4 percent in 2009.
- Staff projection:
  - Staff projects the economy to contract by 6 percent in 2009, with a modest recovery beginning in the middle of 2010.
- Executive Directors’ assessment:
  - Welcomed authorities’ prompt and appropriate policy responses; noted immediate prospects are highly dependent on developments abroad and downside risks remain.
  - Financial stability was highlighted as a key immediate task; Directors encouraged raising private capital where necessary and, if insufficient, considering public investment at prices protecting taxpayer interests and a bad-bank model.
  - Encouraged review of supervisory intervention toolkit and increases in the Financial Supervisory Agency’s capacity; strengthen coordinated cross-border oversight and crisis resolution mechanisms.
  - Welcomed aggressive monetary easing; further immediate steps into quantitative easing should remain under review.
  - Noted krona is probably modestly undervalued; recent steps to raise international reserves and swap arrangements boost the Riksbank’s capacity to respond to liquidity stresses.
  - Endorsed significant fiscal stimulus for 2009; most Directors did not see a need for additional discretionary fiscal action at present.
  - Suggested retaining current fiscal rules; many Directors considered supporting nominal spending ceilings with a new commitment that allows adjustments offsetting revenue impacts of discretionary tax reforms.

### Authorities’ (Sweden) statement and views (Statement by Jens Olof Henriksson, July 22, 2009)
- Authorities broadly agree with staff’s overall assessment: Sweden has sound long-term prospects but is currently in a deep recession.
- Authorities agree that monetary and fiscal policy have been well designed: accommodating monetary policy, strong automatic stabilizers, additional fiscal measures in line with the European Union Recovery Plan, and labor market policies to avoid unemployment persistence.
- Near-term outlook and risks:
  - Authorities are somewhat more optimistic than staff on output growth and support from global growth; staff’s forecasts of GDP and output gaps are on average more pessimistic.
  - Authorities note differences may stem from different estimates of actual and potential GDP and trend forecasting methodology.
  - Authorities acknowledge potential output has been adversely affected by the crisis but are more optimistic on export developments: export orders increased in the last two months and the PMI for Sweden is back in the area of growth and well above the PMI in the USA and the EU.
  - Authorities do not regard household sector or weakening housing and property markets as considerable risks; Riksbank stress tests indicate households’ debt servicing ability is only slightly affected by increased unemployment.
- Financial sector policy and framework:
  - Sweden implemented the European Council Conclusions (October 2008) framework: support for troubled credit institutions, increased and widened deposit guarantee, guarantee scheme for bank borrowing, and a recapitalization scheme. The National Debt Office appointed as Support Authority.
  - Contingency planning conducted by the Standing Committee (Ministry of Finance, Riksbank, Finansinspektionen, Riksgälden).
  - Banks’ Baltic operations remain a concern; stress tests show banks should remain above minimum required Tier 1 ratios even if the Baltic situation further deteriorates.
  - Authorities agree supervisory authority needs adequate resources; resources for the Swedish FSA were increased by more than 10 percent for both 2008 and 2009.

### Selected economic and social indicators (as presented)
- Real economy (in percent change, Forecast 2010 included)
  - Real GDP: 2004 4.1; 2005 3.3; 2006 4.2; 2007 2.6; 2008 -0.2; 2009 -6.0; 2010 0.0
  - Domestic Demand: 2004 2.0; 2005 3.2; 2006 3.9; 2007 4.1; 2008 0.2; 2009 -3.9; 2010 -0.4
  - CPI inflation: 2004 1.0; 2005 0.8; 2006 1.5; 2007 1.7; 2008 3.3; 2009 1.8; 2010 2.1
  - Unemployment rate (in percent): 2004 6.3; 2005 7.6; 2006 7.0; 2007 6.1; 2008 6.2; 2009 9.2; 2010 10.2
  - Gross national saving (percent of GDP): 2004 23.1; 2005 24.2; 2006 26.8; 2007 28.3; 2008 27.4; 2009 23.1; 2010 22.6
  - Gross domestic investment (percent of GDP): 2004 16.8; 2005 17.7; 2006 18.5; 2007 19.4; 2008 20.0; 2009 18.9; 2010 18.6
  - Potential Real GDP: 2004 2.8; 2005 3.4; 2006 3.5; 2007 2.3; 2008 2.3; 2009 1.5; 2010 1.2
  - Output Gap (as a percent of potential): 2004 0.0; 2005 -0.1; 2006 0.6; 2007 0.9; 2008 -1.5; 2009 -8.7; 2010 -9.8
- Public finance (in percent of GDP)
  - General government balance: 2004 0.6; 2005 2.0; 2006 2.4; 2007 3.8; 2008 2.5; 2009 -4.1; 2010 -5.2
  - Total Revenues: 2004 53.3; 2005 54.5; 2006 53.8; 2007 53.6; 2008 52.9; 2009 47.3; 2010 46.5
  - Total Expenditures: 2004 52.7; 2005 52.5; 2006 51.4; 2007 49.8; 2008 50.3; 2009 51.4; 2010 51.7
  - Structural balance (as a percent of potential GDP): 2004 0.4; 2005 1.2; 2006 1.3; 2007 1.9; 2008 2.5; 2009 0.3; 2010 0.0
  - General government gross debt: 2004 51.2; 2005 51.0; 2006 45.9; 2007 40.5; 2008 38.0; 2009 43.5; 2010 49.2
- Money and credit (12-month, percent change)
  - M0: 2004 -0.2; 2005 2.2; 2006 0.4; 2007 -0.3; 2008 -1.0
  - M3: 2004 4.0; 2005 12.9; 2006 15.0; 2007 18.7; 2008 8.2
  - Credit to non-bank public: 2004 6.1; 2005 10.8; 2006 11.2; 2007 14.3; 2008 10.9
- Interest rates (year average)
  - Repo rate: 2004 2.1; 2005 1.7; 2006 2.3; 2007 3.5; 2008 4.1
  - Three-month treasury bill rate: 2004 2.1; 2005 1.7; 2006 2.3; 2007 3.6; 2008 3.9
  - Ten-year government bond yield: 2004 4.4; 2005 3.4; 2006 3.7; 2007 4.2; 2008 3.9
- Balance of payments (in percent of GDP)
  - Current account: 2004 6.7; 2005 7.0; 2006 8.6; 2007 8.6; 2008 7.8; 2009 5.0; 2010 4.6
  - Trade balance: 2004 8.1; 2005 7.8; 2006 7.9; 2007 7.3; 2008 7.4; 2009 7.1; 2010 6.5
  - Foreign Direct Investment, net: 2004 -2.9; 2005 -4.5; 2006 0.7; 2007 -3.5; 2008 1.3; 2009 -2.1; 2010 -2.1
  - International reserves (in billions of US dollars) 1/: 2004 22.4; 2005 26.4; 2006 28.2; 2007 30.5; 2008 30.3; 2009 38.1; 2010 38.9
  - Reserve cover (months of imports of goods and services): 2004 2.0; 2005 2.1; 2006 2.0; 2007 1.8; 2008 1.6; 2009 2.0; 2010 2.0
- Exchange rate
  - Exchange rate regime: Floating Exchange Rate
  - Skr per U.S. dollar (June 15, 2009): 7.87
  - Nominal effective rate (2000=100): 2004 100.8; 2005 98.7; 2006 99.4; 2007 101.6; 2008 100.4
  - Real effective rate (2000=100) 2/: 2004 89.9; 2005 85.2; 2006 82.7; 2007 86.5; 2008 85.9
- Fund position (August 31, 2009)
  - Holdings of currency (in percent of quota): 83.61
  - Holdings of SDRs (in percent of allocation): 79.92
  - Quoata (in millions of SDRs): 2395.50
- Social indicators (reference year)
  - GDP per capita (in current PPP US dollars, 2006): 31,062
  - Income Distribution (ratio of income received by top and bottom quintiles, 2005): 3.3
  - Life expectancy at birth (2005): 78.4 (males) and 82.9 (female)
  - Automobile ownership (2004): 456 per thousand
  - CO2 Emissions (tonnes per capita, 2003): 5.6
  - Population Density (inhabitants per sq. km., 2005): 22
  - Poverty Rate (share of the population below the established risk-of-poverty line, 2005): 9%

*Source: International Monetary Fund — staff report information and Public Information Notice (PIN) on the 2009 Article IV Consultation with Sweden.*

### conclusion that additional resources are not a priority, but there are other issues, primarily

### conclusion that additional resources are not a priority, but there are other issues, primarily

### Crisis-management roles and governance
- The FSA plays an important role in a banking crisis situation and in continued supervision of a bank subject to authority measures, but "the FSA cannot be expected to handle all issues related to crisis management."
- The government has appointed the National Debt Office as Support Authority.
- The government is currently considering what the next step should be.
- Governance issues are identified as primary matters needing attention.

### Fiscal policy and framework
- The government broadly agrees with staff’s view of the fiscal position and the appropriate fiscal policy stance in the current economic situation.
- Sweden entered the downturn in robust fiscal health; the government’s commitment to the budgetary rules − the surplus target and the nominal expenditure ceiling − is a key factor.
- Government objective: keep public finances in good order so deficits are temporary and manageable, preserving confidence in economic policy and welfare foundations.
- The initial strong fiscal position has permitted full operation of automatic stabilisers plus room for additional discretionary measures.
- Package of measures presented since the 2009 Budget Bill:
  - Total allocation of SEK 45 billion in 2009 (1.5 percent of GDP).
  - Total allocation of SEK 60 billion in 2010 (2 percent of GDP).
  - Measures include structural tax cuts, increased municipality grants (preventing municipalities acting pro-cyclically), and increased resources to the labor market (preventing long-term unemployment and improving conditions for those most detached from the labor market).
  - The size of the discretionary package is fully in accordance with the European Union Recovery Plan.
  - The fiscal stimulus (discretionary measures and automatic stabilisers together) is, similar to staff’s projections, one of the largest in the EU.
- Risks and uncertainties highlighted:
  - Near-term development of the budget balance is highly uncertain due to the crisis.
  - Tax revenues have fallen dramatically due to the economic downturn.
  - Strong automatic stabilisers make the budget balance very sensitive to a more prolonged recession.
  - No guarantee that the budget balance automatically reaches the surplus target when the economic situation improves; the crisis may affect potential output negatively.
  - Plausible estimates of potential output yield widely varying estimates of the structural balance and the fiscal outlook.
  - Unclear how much public debt will rise due to financial sector rescue operations that may prove necessary.
- Government policy stance:
  - Will continue to closely monitor and examine the situation when making policy choices.
  - Current assessment, in line with staff’s, is that there is very little room for further reforms.
  - Will continue to tackle the crisis, weighing each measure for its effects on jobs and public finances.
- On the expenditure ceiling:
  - Staff suggests linking the expenditure ceiling more closely to the surplus target by allowing the ceiling to be adjusted if tax rates are cut after the ceiling has been settled.
  - The government agrees that principles for how the expenditure ceiling is determined might be improved, but notes substantial difficulties that need closer examination.
  - The issue, together with the formulation of the surplus target, is currently under review.

### Monetary policy and framework
- The Riksbank welcomes staff’s conclusion that:
  - It is one of the most transparent central banks.
  - Transparency has increased credibility and enhanced communication.
  - Its inflation targeting framework has worked well.
- The Riksbank agrees that the framework and the effectiveness of different policy actions will need evaluation in the aftermath of the crisis.
- The Riksbank concurs with staff that risks of sustained disinflation in the Swedish economy are low and that monetary policy can and should focus on mitigating the downturn and enhancing resilience to additional shocks.
- Staff suggests monetary policy, conventional and unconventional if needed, should remain aggressive; Riksbank actions are consistent with staff suggestions.
- Riksbank forecast (as presented in the source):
  - Inflation will, during 2009, fall below the lower bound of the target.
  - Inflation will remain within the bound of the target in 2010.
  - Inflation will rise above the upper bound of the target in 2011.
  - Inflation expectations remain steady around the target in the long run.
- Recent Riksbank actions:
  - Repo rate was cut to 0.25 percent.
  - Announced repo rate path supported by Riksbank offer of loans to monetary policy counterparties at a fixed interest rate with a maturity of approximately 12 months.
- Foreign reserves and exchange rate:
  - Staff expresses concerns regarding foreign reserves and recommends further strengthening, motivated by possible banking sector liquidity stress and possible spillover effects on the krona.
  - The Riksbank has recently raised its reserves by SEK 100 billion and has swap agreements with both the Federal Reserve and the ECB.
  - The Riksbank is currently not planning any further actions to strengthen reserves and does not have an explicit target for the exchange rate.

### Final note
- The author looks forward to conveying the outcome of the Board discussion to authorities, completing the constructive dialogue with Fund staff during this consultation.
- On behalf of the authorities, the author looks forward to fruitful cooperation in the years to come and the authorities intend to authorize publication of the staff report, in accordance with normal Fund procedures.

*Source: _cr09247 - conclusion that additional resources are not a priority, but there are other issues, primarily*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09247.pdf_