Sweden may have to change laws to tackle Covid-19

Sweden’s central bank may need to have some of its age-old laws changed if it is to act on a pledge to do “whatever it takes” to save the economy.

The Riksbank’s 352-year history gives it the distinction of being the world’s oldest central bank. But the legislation governing it has yet to catch up with the kind of policy it needs to deliver to address the crisis triggered by Covid-19.

Specifically, the Riksbank does not have the legal right to buy bonds issued by companies, even though it has made clear it is ready to do so as part of a recent package of emergency measures.

“The intention of the current Riksbank Act doesn’t allow the bank to make outright purchases of corporate bonds or other private securities on the primary or secondary markets,” said Niklas Schullerqvist, secretary to the parliamentary committee charged with overhauling the bank’s policy framework.

So far the Stockholm-based central bank has bought 5.6billion krona ($568m) worth of corporate commercial paper as part of an emergency quantitative-easing plan. But it has refrained from buying corporate bonds — an important source of financing in the biggest Nordic economy — despite repeated assurances it will do so.

Schullerqvist said the Riksbank needed to consider EU legislation on state aid as corporate bond purchases “may be considered supporting some specific parts of the economy”.

Riksbank spokesperson Tomas Lundberg said the bank’s legal team was looking into the matter, but would not comment further because “it’s an ongoing process”.

Meanwhile, a proposal due to be voted on by legislators may strip Sweden’s central bank of its right to do any form of quantitative easing beyond the purchase of government bonds. According to the bank, “The proposed bill limits the Riksbank’s capacity to act, for instance by not allowing the Riksbank to purchase other securities than government papers, unless there are special reasons, or making lending to the banks conditional on them increasing their lending to companies. If this bill had applied now during the coronavirus pandemic, it would have limited the Riksbank’s monetary policy toolbox and it would have been unclear what the Riksbank was allowed to do.”

In a recent interview with Bloomberg, Riksbank governor Stefan Ingves said purchases of investment-grade bonds were “certainly on our agenda”. He also said there were “some legal issues when it comes to buying into the primary market”.

Sweden’s primary bond market is a vital source of funding for the country’s businesses. And with recordlow borrowing costs and a growing investor base flush with cash, the market’s growth has increasingly shaped Sweden’s economy.

But the market has been turned on its head since the Covid-19 crisis hit. Investors panicked and tried to redeem their cash, prompting 35 fixedincome funds to shut their doors. Even so, clients withdrew record quantities of cash and a spike in yields locked out all but a handful of top-rated borrowers.

In April, Sweden’s syndicated public bond market only saw corporate issuance from investment-grade companies such as Volvo, Industrivarden and Scania, as well as state-owned entities including Jernhusen, Akademiska Hus and Sveaskog.

The crisis that has hit the corporate bond market has drawn pleas from the investor community for the Riksbank to intervene before it’s too late.

The Riksbank “should support new money rather than being very active in the secondary market”, Daniel Sachs, CEO at credit manager Proventus Capital Management, said.

Magnus Nilsson, founding partner of Nordic Cross Asset Management, says that a “first step” towards making it easier for struggling businesses to access funding “would be for the Riksbank to get involved in the primary market for investment grade bonds”.

THE RIKSBANK DOES NOT HAVE THE LEGAL RIGHT TO BUY BONDS ISSUED BY FIRMS, EVEN THOUGH IT HAS MADE IT CLEAR IT IS READY TO DO SO