Banks in Sweden Face New State Lender Plan Targeting Price Cuts

Sep 01, 2014 10:05 am ET

Sept. 1 (Bloomberg) -- Sweden’s Social Democratic Party, which polls show will probably oust the government of Prime Minister Fredrik Reinfeldt this month, wants to use the state’s mortgage lender as a lever to lower the cost of home finance.

State-backed SBAB will be incorporated in Social Democratic plans to make housing more affordable, Magdalena Andersson, the party’s economic spokeswoman, said yesterday in an interview after holding a press conference in Stockholm.

“Absolutely, I think we should use SBAB as a player in the market to put pressure on the big banks,” Andersson said. “Many big banks have wide margins, and it’s then important that we have proper competition in the market.”

A graduate from the Stockholm School of Economics who also attended Harvard, Andersson has used the election campaign to unveil her party’s goal of supporting the housing market through targeted measures including increased construction. The plan may threaten the dominance of Sweden’s four biggest banks, Svenska Handelsbanken AB, Swedbank AB, Nordea Bank AB and SEB AB. It also risks colliding with warnings from the central bank, which has cautioned against fanning Sweden’s credit and housing markets.

“These proposed measures are likely to counteract the Swedish central bank and financial regulator’s focus on macro- prudential measures and may further fuel house price inflation and household leverage,” Royal Bank of Scotland Group Plc said in a note to clients today.

Shares in Swedbank, Sweden’s biggest mortgage lender, lost as much as 2 percent today, their steepest intraday decline in a month. Sweden’s other three big banks also fell.

Welfare Spending

Swedes, who polls show have grown weary of government tax cuts they fear have eroded their welfare base, look set to vote in a Social Democrat-led coalition promising more spending on job creation. Opposition leader Stefan Loefven said last week jobs are more important than the fiscal restraint needed to reach a budget surplus.

The Social Democrats would together with the Green Party and the Left Party get 48.8 percent of votes if an election were held today, according to the average result of five different polls carried out in August and compiled by Novus. Reinfeldt’s four-party coalition would win 37.6 percent.

Andersson last month drew criticism from Finance Minister Anders Borg after revealing her party may seek to relax a mortgage cap in place since 2010 if Sweden introduces forced amortization for mortgages. Failure to find a policy mix that addresses Sweden’s record consumer debt burden could trigger a monetary policy reaction. The central bank has signaled it will tighten policy if the government and regulator don’t do enough to rein in debt.

Bank Scrutiny

Yet even the central bank may face scrutiny under a Social Democrat-led government after the party questioned the fallout of its policies on unemployment. Others, including Nobel Laureate Paul Krugman, have also faulted the bank for its focus on debt while the country sank into a disinflationary spiral.

A report today showed manufacturing slowed more than estimated by economists last month, with the subindex measuring employment even signaling a contraction. The news sent the krona down as much as 0.6 percent against the euro.

“We have been clear with this,” Andersson said. “We think it is suitable to do a larger review where adjustments can be proposed. This needs to be across blocs and done in a parliamentary committee. The Social Democrats will push to make the part of the Riksbank’s work that is to take employment into account stronger than today.”

The International Monetary Fund says Swedish policy makers need to support a weak labor market without exacerbating risks facing over-indebted consumers.

Not Enough

“Unemployment has remained high and has been borne disproportionately by the young, low-skilled and foreign-born,” the IMF said in a report published over the weekend. At the same time, the Washington-based group cautioned against complacency in tackling credit growth.

“Even though first steps have been taken to strengthen mortgage amortization and address housing supply shortages, these measures are unlikely to stop household credit growth against a background of record-low borrowing costs and strong expectations that house prices will continue to increase,” the fund said.

Supply Issues

Andersson blames a housing shortage for the nation’s rising property prices and debt burdens. To address this, the Social Democrats say they want to inject 3 billion kronor ($429 million) into SBAB and use that to finance construction of both rental and owner-occupied homes. SBAB on Aug. 28 said it had shelved a planned product expansion to focus instead on its mortgage and residential financing business.

That followed the ousting of Carl-Viggo Oestlund as SBAB’s chief executive officer in January after less than two years into the job. He was fired after costs tied to the product expansion increased at a faster pace than expected. Sweden created SBAB in 1985 and in 1991 the lender started to compete with commercial banks for mortgages, according to its website.

SBAB had a market share of 7.3 percent of Swedish mortgages in the second quarter, unchanged from the first three months of the year.