EU signs off on Sweden’s banking rescue package

Sweden’s plan to stimulate lending by offering the country's banks up to 50 billion kronor ($6.0 billion) gained approval from the European Commission on Wednesday.

“The scheme is in line with the commission’s guidance on support measures for banks during the financial crisis,” the EU’s executive arm said in a statement.

In particular, “the measures are limited in time and require a significant proportion of private investment alongside the state intervention,” the commission noted, calling the scheme “an adequate means to remedy a serious disturbance of the Swedish economy.”

Earlier this month the Swedish government made a six-month offer to buy up to 70 percent of new bank share issues at market price, although it would prefer that the private sector be the major source of fresh funds.

“The Swedish recapitalization scheme should contribute to strengthening the confidence in the Swedish banking sector and, above all, to provide finance to the real economy in these difficult times,” said EU Competition Commissioner Neelie Kroes.

“The scheme is building on private contributions to the recapitalization, which gives sound incentives to the markets.”

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

The capital injection programme will be financed through a “stability fund” set up in October when the government also announced a massive 1.5 trillion kronor initiative comprising mainly bank loan guarantees.

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.

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.