The Real Bottom Line
Sweden has reached the real bottom line yesterday. Their central bank has cut interest rates it charges to banks to zero for 0.25%. The Riksbank yesterday surprised markets by opting to hit the “zero bound†although it had been expected to delay this. No other central bank has pushed the cost of borrowing to zero in the quantitative easing period since the global financial crisis, but now others may follow.
Our Fed targets keeping interest rates at 0.0% to 0.25%; the Japanese CB rate is 0.10%. The Bank of England charges 0.5%. The European Central Bank cut its charges to 0.05% last month.
But the Riksbank rate is now fixed at 0.0%. Zero. Nada. Nichts. Nichevo. Rien.
Adrian Ash thinks this may lead to paying lenders to take Riksbank loans, the next step beyond zero interest rates. The Swedish crown fell sharply on the news, as could have been expected.
There are two real problems with the trend.
Firstly, however cheap money may become, if governments and homeowners and companies do not want to borrow because they do not want to risk investing in infrastructure, homes, or expansion, then cheap money will not create growth. In Sweden or in the European Union, in Britain or Israel.
Secondly, as with any excessive move in a single country, there is an element of “beggar-my-neighbor†in rate cuts. This can go badly wrong, and did so in the recovery from the Great Depression. I fear its return because of what Sweden is.
Stockholm Syndrome
Sweden is a Scandinavian regional financial powerhouse. It is the home of major multinational corporations like Ericsson, Electrolux, Scania, Sandvik, SCA, Atlas Copco AseaAbb, SKF, Aga, Volvo, Hennes & Mauritz, and Alfa Laval. These firms make it a major exporter of cars, telecom equipment, chemicals, phrama, machinery and precision equipment, appliances, wood, and iron and steel. It also remains the banking and investment capital of the Nordic countries. And then there is ABBA!
If you did not read The Financial Times, the Wall Street Journal, or NZZ today, you might believe the European banking sector mostly passed the stress test over the weekend. Beware. Firstly, the ECB ran the results past national regulators (except in the case of Poland which simply was omitted entirely because of delays). That means German banks’ solid reputation was boosted by deliberately un-updated inputs from the Bundesbank, which thereby downplayed Deutsche Bank‘s litigation risks.
