Sweden offers banks billions more in aid

The Swedish government announced a new rescue package for the banking sector on Tuesday worth up to 50 billion kronor ($6 billion).

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If the banks decide to increase their capital by issuing new shares, the government said it would take up to 70 percent of any such offer, although it would prefer that the private sector be the major source of fresh funds.

"Getting the credit markets working again is essential to avoid a worsening of the economic downturn. That is why we are presenting new measures to boost (the flow) of credit," Finance Minister Anders Borg and Financial Markets Minister Mats Odell said in a statement.

Any banks participating in the programme would have to freeze executive and board salaries for two years and halt all bonuses while limiting lay-offs.

"The idea is not to subsidise the banks," Odell told Swedish radio.

"We will be taking a stake in the banks just like any other shareholder. If it works out, then taxpayers will have their share of a good investment," he added.

The capital injection programme would be financed through a massive 1.5 trillion kronor "stability fund" set up by the government and approved by the Swedish parliament in October.

When the government put up the stability package, however, all the major banks with the exception of struggling Swedbank said they would not participate due to the strict conditions involved.

Since then, the global financial crisis has got considerably worse, with banks reeling under the pressure of massive losses on their toxic assets.

As they have tried to ring fence the damage, they have hoarded cash rather than lend it out for fear of incurring further losses as the global economy sinks into the worst recession in decades.

The resulting credit crunch has only made the downturn worse by starving business of the funds needed to keep going and so increasing the risk of a vicious circle that plunges the global economy into death spiral.

At the end of last year, central bank chief Stefan Ingves warned that the international financial crisis would likely deepen in 2009 and wreak further havoc on the Swedish economy.

Sweden slipped into recession in the third quarter of 2008.

"The outlook for 2009 is dire. Everyone had expected the economic situation to weaken but not that the economy would worsen so quickly and become as feeble as what we are now seeing," Ingves said.