No help in sight for sinking [Swedish] krona [FT]
By Peter Garnham
Published: March 9 2009 20:00 | Last updated: March 9 2009 20:00
The Swedish krona has suffered its steepest fall since it was allowed to float in 1992 and has been the worst performing major currency during the financial crisis.
Since the collapse of Lehman Brothers last September, the krona has dropped almost 20 per cent against the euro, last week falling to a record low of SKr11.7860, and has declined 27 per cent against the dollar.
Typically, the krona performs badly when global stocks markets come under pressure. “We are talking about a relatively small, illiquid market, which investors leave quickly in case of rising risk or deteriorating sentiment,” says Antje Praefcke at Commerzbank.
But support for the currency has also been undermined by deteriorating conditions in Sweden’s export-driven economy, especially in the automobile sector.
Saab, the carmaker, has sought protection from its creditors and is hoping to restructure with the help of a $647m loan from the European Investment Bank. Ford wants to sell Volvo Cars and cut jobs at the company.
Swedish industrial production and new orders slumped far beyond expectations in December, while fourth quarter gross domestic product figures revealed a 4.9 per cent annualised fall.
This has heightened expectations that the Swedish central bank, which slashed interest rates by 100 basis points to 1 per cent this month, will have to cut rates again by at least a further 25bp at its next policy meeting, scheduled for April 21.
“Quantitative easing will also have to be contemplated in the course of 2009,” says Audrey Childe-Freeman at Brown Brothers Harriman.
It is not just sentiment on equity markets or worries over the economy that is driving the krona lower. The high exposure of Swedish banks to a potential collapse in the Baltic states is also adding pressure.
Ms Praefcke says the issue represents a “sword of Damocles” for the krona. “While uncertainty on the markets regarding eastern Europe as a whole remains high, the krona remains vulnerable to further losses.”
Many observers believe the Riksbank, Sweden’s central bank, has been complicit in the krona’s fall.
Dan Katzive at Credit Suisse says the current crisis is perfectly designed to derail the Swedish currency. “Perhaps most damaging to the krona, the central bank has not objected to its weakness and, indeed, has appeared to encourage it at times,” he says.
Robert Stenram, a former senior Swedish banker, says Sweden is carrying out a competitive devaluation, something that is not appreciated in the outside world. “Sweden is experiencing a currency crisis, with the Riksbank the only global central bank talking down its own currency,” he says.
While a moderate devaluation could help exporters, the recent fall in the krona risks sucking in imported inflation, which would only exacerbate Sweden’s problems, Mr Stenram says.
“There is a limit to how far a devaluation can go without damaging the country,” he says. “This is a very dangerous situation.”
So far, the Riksbank has shown little willingness to intervene to stem the krona’s fall, even verbally.
Lars Svensson, deputy governor of the Riksbank, even floated the possibility of intervening to weaken the currency in a bid to stimulate the country’s economy.
Mr Svensson has also noted that it would be possible to view an appreciation of the exchange rate as evidence that anti-deflation efforts were failing.
“The clear message from the Riksbank is one of minimal concern ... an apparent preference not to see this depreciation reversed,” says Mr Katzive.
The authorities expect the krona’s weakness to be temporary and for it to appreciate once the worst of the crisis is over, partly because Sweden has a stable surplus in foreign trade.
But last week, Svante Öberg, first deputy governor of the Riksbank, admitted there was a risk that the krona’s weakness could be more prolonged. “This would lead to exports strengthening and imports slowing down, but at the same time provide an inflationary impulse... This may be an advantage in the short term, as economic activity is now weak and inflation is low,” he said.
“But in the longer term, a currency that fluctuates substantially can be a problem. It increases uncertainty.” |
