Sweden faces ‘late exit’ from recession: IMF

Sweden appears set to stay in recession for longer than most other countries and ought to take steps to further strengthen its beleaguered banks, according to a new assessment from the International Monetary Fund.

Sweden faces 'late exit' from recession: IMF

Swedish banks’ exposure to economies in the Baltic region has contributed to persistent market doubts, the IMF said in a report that follows its consultation in late July with Swedish authorities. The international financial body noted that “steps to strengthen banks further—including raising private capital where necessary—should be undertaken as soon as possible.”

The IMF estimated that Swedish GDP would shrink by 6 percent in 2009, with a “modest” recovery to be expected in mid-2010.

Sweden’s export composition and the regional role of its banks meant that the country had been hit harder than most by the global downturn.

The IMF said it “welcomed the authorities’ prompt and appropriate policy responses, which have allayed immediate concerns with financial sector stability, and helped cushion domestic demand.”

But the country’s prospects for recovery are largely dependent on overseas developments, it added.

“If global demand for Sweden’s output bundle recovers slowly relative to other components, Sweden could have a late exit out of the current recession,” the IMF said.

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IMF warns of Swedish housing bubble

The International Monetary Fund has warned that Sweden is suffering from a housing bubble and has called for a halt on loans that don't require amortization.

IMF warns of Swedish housing bubble

“A sudden and sizeable fall in Swedish property prices could have a knock-on effect on consumption and unemployment, with negative repercussions on banks through non-performing loans and funding costs,” the IMF wrote in a new report published on Thursday.

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The IMF warns that the fall out could have regional consequences across Scandinavia and the Baltic region and identified the main risks as the high level of household debt, which is amongst the highest in the OECD.

Furthermore the IMF warns of banks that are excessively large in relation to the country’s GDP and weaknesses in bank financing models, explaining that the risks are more pronounced due to the low levels of amortization on mortgages and deficiencies in the tax system.

“Domestically, household debt is high and rising, reflecting tax incentives, easy access to low-amortization mortgages, and very low interest rates,” the report stated.

With regards to the tax system, the IMF recommends a review and raises the prospect of phasing out breaks and mortgage interest tax relief.

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Sweden’s Riksbank on Thursday confirmed that the main base (repo) interest rate will remain at one percent and left its forecast unchanged. The repo rate is due to be raised towards the end of 2014, according to the forecast.

The Riksbank’s decision means that fluctuating interest rates are set to remain the same (at around 2.9 percent) for the time being.

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