Sweden may set up own wealth fund

STOCKHOLM: Sweden could set up a sovereign wealth fund as a way of solving its illiquid bond market problem, Finance Minister Magdalena Andersson said in a Reuters interview.

The idea is to issue more government bonds — to increase the market supply — and put the money into the fund because it is not needed for the general coffers.

Andersson would not specify any trigger level for the state debt, but said that Sweden’s next door neighbour Norway, despite having the world’s largest wealth fund, had a debt level of 30% of gross domestic product (GDP).

Swedish government projects debt falling to around 31% of GDP by 2020 thanks to a surging economy.

A plan to cut the currency reserve in half over the next few years will knock roughly 5% off that figure.

With euro zone countries struggling with debt levels close to 90% of GDP on average, Sweden’s situation may seem enviable. But it brings with it problems.

With so little debt, there is a liquidity premium to hold Swedish bonds. The concern is that investors may stay away, making it more costly and more difficult to borrow, for example if the government needed to bail out the banks during a future crash.

“If state debt is so low that we get a problem with liquidity in government bonds, then the Norwegian solution is a possibility,” Andersson told Reuters. “Combining a fund with debt, so there is liquidity in government bonds, that is absolutely a possibility.”

Norway’s $915 billion wealth fund, the world’s biggest, owns about 1.3% of all stocks listed globally.

Any fund created by the Swedish government, which recently set a target of having debt of 35% of GDP, would be considerably smaller than that of its Nordic neighbour.

Were the government to borrow 5% of GDP, taking debt from 30% to the target 35%, that would equal about 200 billion Swedish crowns ($22.2 billion) that Sweden could put into a rainy-day fund.

When it took power in 2014, the Social Democrat-led coalition government complained that tax cuts by its centre-right predecessor had emptied state coffers. But rapid growth and falling unemployment have reversed the situation.

Finances are expected to show a healthy surplus of 0.3% of GDP this year and 0.5% next year, according to fiscal watchdog ESV, with Sweden enjoying a Goldilocks period where the centre-left can increase spending and still meet its target of running a surplus.