‘We need to do more for bank sector’: Borg

Finance Minister Anders Borg spoke on Thursday of the need for Sweden to further bolster the banking sector.

Sweden must also do more to expand fiscal policy to help the economy even though a falling krona and interest rate cuts have cushioned the slowdown, said the finance minister said on Thursday, speaking to Reuters on the sidelines of the World Economic Forum.

Borg also reiterated that joining the euro will benefit Sweden in the long term.

Prime Minister Fredrik Reinfeldt, who is also attending the annual meeting in Davos, said support for the single currency has increased but a referendum was unlikely in the next couple of years.

Last week, Sweden proposed temporary corporate tax relief, the latest in a string of measures to help cushion a steep economic downturn.

The government is planning to allow firms to put off payment of employment and other taxes by up to one year. The measure, planned to take effect in March, is aimed at reducing firms’ liquidity problems.

Borg, asked whether the government has taken enough steps, said: “We have done measures to stabilise the banking and the financial system but obviously we need to do more, in terms of stabilising the banking sector, in terms of fiscal policy.”

“We need expansionary policy at the current juncture…. We are planning to strengthen our programme in dealing with banks. In the near future we will come back on this issue.”

Sweden’s economy sank into recession in the third quarter and Borg warned the fourth quarter was also likely to experience contraction.

“Certainly the profile will be basically of very, very weak growth in 2009. But we have very strong automatic stabilisers: the crown has weakened and the Riksbank has cut rates. So they are dampening forces (of the slowdown),” Borg said.

Sweden’s central bank slashed its main interest rate by a record 175 basis points in December to 2.0 percent. The krona hit a record low around 11.4 kronor per euro late last month.

Borg reiterated the government was not planning to take stakes in the struggling domestic car industry.

“We don’t believe in the state-owned car industry. The government can do a lot in terms of providing finance or research and development,” Borg said.

The euro debate

Unlike Sweden, some of its neighbours which have a smaller economy have been hit more severely by the credit crisis and countries like Iceland have increasingly been debating the benefits of joining the euro.

Many analysts say that belonging to the powerful currency area shields its member states against external shocks linked to the financial crisis.

Sweden rejected the euro in a referendum in 2003.

“It’s not foreseen in the next couple of years… And I would not put out Sweden in a referendum campaign if it wasn’t clear to me that there was great support for actually going to the euro,” Reinfeldt said.

“We have had an increase in the support of the euro also in Sweden, but not as clearly as in a few other countries.”