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Thursday 8 December 2016

Sweden emerges as ‘safe harbour’ from debt woes plaguing Europe

Niklas Magnusson and Adam Ewing

Published 21/05/2010 | 12:37

When the Baltic countries’ economies collapsed, investors fled Sweden because of its banks’ investments there. Today, they’re flocking to the Nordic country as a refuge from debt-ridden southern Europe.

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Banks in Sweden, including Nordea Bank AB and SEB AB, have less at risk in Greece, Italy, Portugal and Spain than most western European countries, Danske Bank A/S figures show.

That lending amounted to 2.6pc of Sweden’s gross domestic product at the end of 2009, compared with 43pc for Ireland and 35pc for France, according to Danske.

The modest exposure of Sweden, which hasn’t adopted the euro, to southern Europe’s debt crisis, coupled with the smallest budget deficit in the European Union has instilled confidence in investors.

Matters were different in 2008 and 2009, when the Baltics suffered the steepest recession in the EU, sending Swedish bank stocks and the krona slumping.

“Scandinavia is viewed by many investors as a safer place to put money considering the debt crisis affecting the euro-zone countries,” said Espen Furnes, a fund manager at Storebrand ASA in Oslo, which oversees about €43bn.

“Nordic banks have been a defensive play, given their balance sheets are much cleaner, and they are a lower-risk investment compared to many other rivals. They seem a safe place to invest right now.”

Stock markets rise

Swedish banks have about €8bn at risk in Greece, Italy, Portugal and Spain, according to the Bank for International Settlements in Basel, Switzerland, and Danske Bank. Denmark’s €2.4bn exposure represents 1.2pc of its economic output.

The benchmark stock indexes in Denmark and Sweden are the best performers in the developed world this year, up 16pc and 1.3pc, respectively.

Finland is ranked fifth. That compares with a slump of 27pc in Greece, 21pc in Spain and 18pc in Portugal.

Sweden’s Svenska Handelsbanken AB, SEB AB and Swedbank AB, the largest Baltic lender, have outperformed the 11pc decline in the 52-member Bloomberg Europe Banks and Financial Services Index this year. Danske Bank is the eighth-best performer on the index after advancing 5.5pc.

In the first quarter, all major Nordic banks reported profit that beat analysts’ estimates. Sweden’s four largest banks, Copenhagen-based Danske Bank and DnB NOR ASA of Oslo reported a combined profit of €1.5bn after loan losses dropped.

Investors are seeking “safe harbours,” said Haakan Frisen, an analyst at SEB AB in Stockholm. Sweden’s public finances make it unlikely there’ll be any “financial mistrust” toward Sweden, he said.

‘Secure Alternatives’

“Investors are looking for secure alternatives outside the euro zone and Sweden and Norway are such countries, with a strong state-financial situation and a good industrial structure that benefit from the global recovery and with a large exposure to the US and Asia,” Frisen said, adding that Nordic banks’ small exposure to southern Europe also benefits the region.

The yield on Sweden’s 10-year note is the lowest in 15 months, at 2.56pc, data compiled by Bloomberg show.

That’s less than the 2.72pc rate Germany pays to borrow for 10 years. The yield on Greek 10-year government bonds stands at 7.83pc. The cost of insuring against a default by Norway, Finland and Sweden are the lowest in the EU, credit default swaps show.

Southern Europe

Sweden, Denmark and Finland are benefitting from investor concerns about the fiscal problems in southern Europe and doubts that the EU will solve the Greek debt crisis and prevent it from spreading to countries such as Spain, Portugal and Italy.

Some investors aren’t convinced Sweden will prove a safe haven if the sovereign debt crisis leads to a global stock market rout.

Sweden’s OMX stock index has dropped 4.3pc this week, while the krona lost 2.1pc against the euro and 2.5pc against the dollar.

In the first quarter of last year, Swedbank slumped 38pc while SEB, the second-largest lender in the Baltic countries, plummeted 57pc.

Swedbank reported a net loss of 10.5 billion kronor (€1.06bn) in 2009 after loan losses and provisions in Estonia, Latvia and Lithuania soared. In the first quarter of 2010, it had net income of 536 million kronor, the first quarterly profit in more than a year.

Sweden is likely to have the smallest budget deficit in the EU in 2010 and 2011, according to EU forecasts.

Sweden, Bulgaria and Estonia are the only EU members forecast this year to meet the euro-region requirement of a budget deficit below 3pc of GDP, even though none of the three countries use the euro.

“In a backdrop of extreme volatility, the Nordic region is a safe place to put your money,” said Karen Olney, a London-based strategist at UBS AG, adding that it may be time to sell Nordic shares and buy shares of exporters in euro countries.

“We are not making a wholesale move out of the Nordic or Scandinavian markets, but we suggest taking profits along the way given there are many to take.”

Bloomberg

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