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Business Feature: Ericsson’s annus horribilis

The year 2007 looks set to be Ericsson's own annus horribilis: the world leader in mobile networks has long been the star of the Swedish economy but is now battling through a crisis with no end in sight.

After two profit warnings and a turbulent week on the financial markets, the group’s market capitalisation has been almost halved to 239.08 billion kronor ($38.14 billion) from 450 billion at the start of the year.

Chief executive Carl-Henric Svanberg, the golden boy in Swedish business circles when he took over the company in 2003, is now under heavy fire for his management of the crisis.

Making matters worse are bribery allegations that arose against the company last week.

“To restore confidence will be a very, very long process of about three or four quarters, or a year, because we have had two profits warnings” in one month, analyst Greger Johansson at the Redeye analysis group told AFP.

Now, Ericsson “has to think about how to communicate with the market, what they can do,” he said, predicting that the company would announce job cuts.

“The solution or action plan can be found in one or two months but the implementation and regaining confidence will take much more than one or two months,” he said.

While Ericsson remains a solid industrial company and a world leader in its field, shareholders have been fleeing the group en masse and the stock has been in freefall since the first profit warning on October 16.

The Ericsson share was valued at 28.2 kronor on the Stockholm stock exchange at the start of the year. On Friday, it closed at 14.72 kronor, a fall of 47.4 percent.

In mid-October, Ericsson dropped a bombshell when it announced that its earnings would be sharply weaker than expected in the third quarter due to a slowing market that was seen continuing through 2008.

It said investments in mobile network expansions and upgrades, which bring in more money than new rollouts, were slowing down and there was also rising competition from Asia.

Third quarter net profit came in at 4.0 billion kronor, a 36-percent fall from the same quarter a year earlier, while operating profit was down by the same amount to 5.6 billion.

And last Tuesday, during a conference with investors and analysts in the United States – where Ericsson is facing several class action suits from shareholders who feel they have been misled – Svanberg reiterated that the problems were set to continue.

He said sales in the fourth quarter would “probably” be in the lower range of the previously announced forecast of 53 to 60 billion kronor.

Criticism has been fierce against Ericsson’s leadership in recent weeks, with analysts commenting that either management doesn’t have a good grasp of developments on the market or it is unable to properly communicate about developments.

But Johansson said he did not expect Svanberg to be sacked.

“I don’t really believe they are going to fire Svanberg, it wouldn’t be good signal,” he said.

On Friday, the chairman of the board, Michael Treschow, reiterated confidence in Svanberg.

“Carl-Henric has headed the company for five years and he has attained positions on the market we have today,” he told Swedish Radio.

“Ericsson is a world leader, has the best profitability and the growth,” he added, noting that “for 18 straight quarters, the company met market’s expectations.”

Treschow said it was not easy to communicate negative news to the but that the company had tried its best.

“Yes it’s still number one in the world. They have the highest share. There is no problem with its products…. (But) the confidence management is down, that’s the point,” Johansson said.

Confidence further undermined by damaging media reports. Last week, Radio alleged that Ericsson had paid bribes to politicians in Oman and to secure contracts.

By AFP’s Delphine Toitou

For members

PROPERTY

EXPLAINED: Will Swedish housing prices plummet as interest rates rise?

The Swedish financial supervisory authority warned on Wednesday that rising interest rates could lead to house prices falling "quite sharply". How likely is it that this will happen?

EXPLAINED: Will Swedish housing prices plummet as interest rates rise?

What financial circumstances might make it difficult for borrowers to repay loans?

With an increase in the cost of living, including rising interest rates and rising electricity prices, there are plenty of circumstances that may make it difficult for borrowers – especially those holding large debts in relation to their income – to repay their mortgages.

Households with large debts are therefore more sensitive to an increase in interest rates, according to the Swedish financial supervisory authority, known in Swedish as Finansinspektionen (FI).

The agency published its annual Swedish Mortgage Market report on Wednesday.

“Large debts also mean a higher sensitivity if you were to suffer unemployment during an extensive recession,” said Henrik Braconier, the authority’s chief economist.

Other factors that could stretch borrowers’ finances include rising energy prices, higher food prices, and growing inflation.

“Apples, oranges, tomatoes have gone up by 30 percent,” said Américo Fernández, a household economist at SEB. “Wheat is coming from Ukraine and it’s getting harder and harder to get hold of.”

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Will homeowners become unable to repay their mortgage loans?

Not according to Fernández.

“One of the last things Swedish households will fail to make their payments on is their mortgage and their houses,” he said. “They would rather decrease their spending on vacations abroad, or restaurants.”

The FI report noted that most new mortgages include margins that allow for fluctuations in the borrower’s finances. This means that mortgage holders have a cushion that allows them to handle financial changes.

“Our stress test shows that they can handle increases in the interest rate and also loss of income,” said Magnus Karlsson, FI’s director of macroanalysis. “New mortgages have margins in them calculating discretionary income, and will be able to absorb increases in interest rates and loss of income.”

SEB foresees an interest rise of up to three percent over the next two years, Fernández said,an increase that can be absorbed by most households.

Both Fernández and Karlsson agreed that if homeowners have to cut back on spending, those cuts will not come from debt repayment, but from their disposable income – the money they might ordinarily spend on entertainment, eating out, or travelling.

So while household spending may have to change, financial stability is not at stake for most households.

What’s going on with the housing market?

Right now, a record number of mortgage-holders have loans that are worth more than 4.5 times their income. This year, more than 14 percent of new mortgagors took on such large loans, compared to 6.3 percent last year.

A “low interest rate, increase in housing prices, increase in disposable real income and a housing market that is not functioning well” are all factors in the large debts that homeowners have incurred today, Karlsson argued.

Fernández noted that there is an imbalance between the low supply of housing and the high demand for housing, which is in part responsible for the high housing prices we see today.

He said a decrease in price of a few percentage points would not be surprising: “We’re coming from two years of exaggerated prices.”

Will housing prices begin to decrease after two years of increasing prices?

Calculations for three different scenarios tested by FI show that housing prices will decrease, Karlsson said.

While the agency does not predict housing prices, its report shows that under three different scenarios – the first an increase in mortgage interest rate, the second an increase in energy prices, and the third a combination of the first two with a reversal to pre-pandemic housing preferences – prices will decrease.

The Local Sweden reported last year about increasing housing costs in Sweden, spurred on in part by a desire for bigger homes further away from urban areas during the COVID-19 pandemic.

Fernández called the two years of increasing housing costs “surprising.”

“10-12 percent two years in a row, that’s historical in these uncertain times,” he said, noting that prices were still increasing in figures for March this year.

What sorts of housing will see the largest price decrease?

The FI report also included various scenarios of how the price of different types of housing may fluctuate based on changes in the interest rate.

One scenario assumed a 1 percent increase in interest rates this year and a 0.5 percent increase next year, and predicted that while the price of apartments owned in a cooperative – called bostadsrätter – would fall only slightly, the price of detached houses would fall by 10 percent.

Another calculation that accounted for rising electricity prices and a decline in new housing purchases found that the price of bostadsrätter and detached houses risked falling by an average of 30 percent.

Is there a plan to let borrowers end their mortgage terms early?

“We believe it needs to be simpler and more inexpensive for households to repay their mortgages early,” FI Director General Erik Thedéen is quoted as saying in a press release published by the agency on Wednesday.

To that end, Thedéen said at a press conference that the agency had sent a request to the government to change the calculation model for how banks are compensated when mortgages are terminated early.

“When you terminate a loan agreement and the bank incurs costs, it must be reimbursed,” Thedéen said. “But at present the banks are overcompensated, that is what our calculations show. If the government follows our line and changes the model and follows our line, then the banks must simply adapt.”

When asked about the likelihood of this request being granted, FI recommended reaching out to the Ministry of Justice for comment.

What does this mean for foreigners in Sweden?

If you’re already a mortgage holder, then as Karlsson and Fernández assured, mortgage calculations include a cushion that allow for changes in your financial circumstances.

If homeownership is in your future, housing prices may begin to decrease in the near future, so it’s worth keeping an eye on your local real estate listings.

By Shandana Mufti

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