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No to government guarantees

To further mitigate the negative effects of the current financial crisis on Swedish households and businesses, the Swedish government has proposed an extensive plan to ensure the stability of the financial system. Part of this has been to present an act on public support to financial institutions.

Fundamental features of the enactment, and various governmental guidelines are that a guarantee programme is introduced of up to SKr1,500 billion ($180 billion) to support banks' and mortgage institutions' short-and medium-term financing needs. Under the guarantee scheme, institutions will have the option to enter into an agreement with the Swedish state, which in its turn will guarantee the institutions' new issues of debt instruments, though in return for a fee.

Other measures taken include a right for the state, if and when certain conditions apply, to compulsorily redeem the other shareholders' stakes in systemically important institutions at market value. Also, a stabilisation fund will be set up to deal with potential solvency problems that may arise in the future.

The scheme is intended to ease the financing constraints now facing banks, as well as lower their financing costs. Surprisingly, to date only a very few institutions have joined the programme because, among other things, many institutions are believed to be relatively financially sound and thus the guarantee fee would be too high a price to pay. It is therefore still unsure if any further institutions will apply. Consequently, the value of the (quite rushed) legislation is still unclear. Some argue that it is necessary for the government to amend the law, making it compulsory for the banks to join the guarantee scheme: only then will banks start lending again, funding costs will be lowered for banks and, as a consequence, household borrowing costs will also drop.

What will Sweden do next? The issue is still extensively debated, but if (or perhaps when) a new initiative is indeed introduced, the government had better pay close attention to market participants so as to avoid non-participation and thus face further powerless public actions.

Filip Dahlstedt

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