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Europe: The Week Ahead (June 17-21), The NIRP Center of Sweden’s Debt Dilemma

By:

Senior Market Analyst at Interactive Brokers

The volume of non-financial corporate debt issuance has generally skyrocketed over the past decade, amid ultra-low, zero, and even negative interest rate policies at several central banks, including Sweden’s Riksbank.

The Swedish central bank elected at its monetary policy meeting in late April to keep its repo rate unchanged at -0.25%, citing softer growth in the country and stubbornly low levels of inflation.

In the minutes to its April meeting, the Riksbank noted that in light of “the unexpectedly low inflation both in Sweden and abroad, low interest rates abroad and uncertainty over the strength of global developments, several members pointed out the importance of monetary policy proceeding cautiously.”

However, it would appear the central bank has committed to a cautious monetary policy stance for several years.

The bank’s repo rate, for example, has moved within a -0.50% to -0.25% range since March 2015, when it embarked on a negative interest-rate policy (NIRP) from a zero interest-rate policy (ZIRP). During that four-year stretch, the Riksbank has only raised the rate once – by 25bps to -0.25% in December 2018.

In fact, the suppression of rates in the nation appears to have persisted since 2008, as the credit crisis roiled global markets and economies.

The repo rate had plunged to 2% in December 2008 from 4.75% in September of the same year, and in April 2008, the bank said a “much lower repo rate and repo rate path are needed to counteract economic developments being too weak and inflation being too low.

“The fact that the interest rate needs to be cut substantially is also due to monetary policy not having such a large impact recently as it normally does.”

If the effectiveness of Swedish monetary policy has hinged on having a low interest-rate, ZIRP or NIRP, then it has strived to revive its “large impact” for over a decade. The Riksbank’s repo rate has remained below the 2% mark at least since March 2009 and has averaged around 0.37% over that period.

Household and Corporate Debt Soar Sky High

As the lower borrowing costs, precipitated by the cuts in the bank’s key rate, enabled corporations and households easier access to the credit markets – the country’s debt levels have risen to massive heights.

According to the Bank for International Settlements (BIS), as a percentage of gross domestic product (GDP), Sweden’s non-financial corporate debt has mushroomed to an average of 151.7% from March 2009 to December 2018 from 108.7% over the previous ten years.

Sweden’s households have also amassed a tremendous amount of debt – to the point where the Riksbank deemed in late May that the level “poses the greatest risk” to the nation’s economy.

The central bank said this means, for instance, that households are “sensitive to changes that affect their finances, such as rising interest rates, rising unemployment and falling housing prices.”  The Riksbank admitted that Sweden’s housing market “functions poorly and the tax system is not well designed from a financial stability perspective.”

Meanwhile, the central bank’s NIRP seems to provide ongoing encouragement to households, as well as corporations, to continue tapping the debt markets – especially at a time when external shocks to the global economy have grown. These worries have been underscored by fears of slowing global growth spurred by trade conflicts between the U.S. and China, along with several other sovereigns, as well as European banking and auto sector worries, and Brexit.  

Confidence Waning

Against this backdrop, Swedish consumer confidence plunged in May to its lowest level in over six years, and while the building and civil engineering industry was relatively positive about its order books, its recruitment plans seemed somewhat pessimistic, signaling a slight reduction in the workforce.

Also, the confidence indicator for the manufacturing industry, which has been trending down since September, fell 4.0 points in the latest month.

Investors in the week ahead are set to receive a fresh Economic Tendency report for June from Sweden’s National Institute of Economic Research (NIER), after the previous month’s figure fell to 99.8 from 102.5 in April.

NIER said the decrease was due to weaker signals from manufacturing and consumers.

Wednesday, June 19

  • Economic Tendency (June)
  • Consumer Confidence (June)
  • Manufacturing Confidence (June)
  • Unemployment Rate (May)

Lower Confidence Creeps Into Stocks

Still, while the softer confidence has yet to materially impact Swedish stocks, it appears momentum may be declining.

Swedish equities – as evidenced by the iShares MSCI Sweden ETF (NYSEARCA: EWD), which has among its top holdings firms such as Telefonaktiebolaget LM Ericsson (NASDAQ: ERIC), Nordea Bank (OTCMKTS: NRDBY) and Volvo (OTCMKTS: VLVLY) – have climbed around 20.2% from their most recent 52-week low set December 2018, nearly erasing its more than 25.5% plunge in the period from late January-December 2018. However, recent uncertainties have spurred losses in the ETF of close to 6% since late April 2019.

The Relative Strength Index (RSI) also signaled the potential for either an up- or a downtrend Tuesday in the ETF, with a gauge of around 50.3.

A broader picture of Sweden’s equity market indicates a recent resurgence of risk-taking, and should market conditions support continued risk appetite, the RSI may well increase.

The OMX Stockholm 30 Index Tuesday rose for the sixth consecutive trading day, gaining 1.2% to a little over 1,593, as global risk sentiment turned more upbeat. Industrial group Atlas Copco (OTCMKTS: ATLKY) led advancers with a 2.9% rise in its shares.

According to Bloomberg, the index is 6.3% below its 52-week high set on April 25, 2019 and 15.6% above its trough at the start of this year.

Global Corporate Debt Levels at Record Highs

Meanwhile, other global central banks have also maintained ultra-low interest-rate, ZIRP or NIRP at least since December 2008, including the European Central Bank (ECB), the Bank of Japan, the Swiss National Bank and the U.S. Federal Reserve.

As of December 2018, the BIS has recorded the amount of non-financial corporate debt as a percentage of GDP in the Euro Area, Japan, Switzerland and the U.S. as 105%, 102.6%, 118.1% and 74.4%, respectively.  

While some of this massive debt burden may be attributed to corporate tax purposes, or fueled by M&A, cheap borrowing costs orchestrated by central bank policies appear to be at the crux of the ever-growing corporate bond issuance mountain.  

The Organization for Economic Co-operation and Development (OECD) recently pointed out that the spike in bond sales is “consistent with the objectives of expansionary monetary policy and the related unconventional measures by major central banks in the form of quantitative easing.”

Between 2008-2018 global corporate bond issuance averaged US$1.7trn, up from US$864bn during the years leading up to the crisis. As a result, the global outstanding debt in the form of corporate bonds issued by non-financial companies surged to nearly US$13tn at the end of 2018, double the amount in real terms that was outstanding in 2008.

Among the risks associated with corporate debt at these nosebleed levels, the OECD pointed to deterioration in the quality of bonds, as well as covenant protection, amplified borrowing costs for issuers with riskier credit profiles, increased pressure on the investment-grade debt market, and higher overall volatility and default risk.

The OECD contends that in the event of a global downturn, “highly leveraged companies would face difficulties in servicing their debt, which in turn, through lower investment and higher default rates may amplify the effects of a downturn,” while  the future direction of monetary policy “will continue to affect the dynamics on corporate bond markets.”

The organization added that in light of the size and maturity profile of the current outstanding stock of corporate bonds, corporations in both advanced and emerging markets are facing record levels of repayment requirements in the coming years.

As of December 2018, companies in advanced economies need to pay or refinance US$2.9tn within three years, with their counterparts in emerging economies US$1.3tn.

At the 1-, 2- and 3-year horizons, advanced and emerging market companies have the highest corporate bond repayments since 2000. The OECD highlighted that for emerging market companies, the amount due within the next three years has reached a record of 47% of the total outstanding amount – almost double the percentage in 2008.

Meanwhile, investors will likely be eyeing further developments in Sweden’s housing market, household and corporate debt levels, and business and consumer sentiment, as well as international factors that have been spurring growth concerns, including the unfolding of U.S.-China trade talks and Brexit for additional insights into the country’s general economic and financial well-being.  

For a full list of U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more, select the Event Calendar option in the IBKR Trader Workstation.

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