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Ali Sina Г–nder
Assistant Professor and Researcher, at Department of Economics at Uppsala University, Sweden
Amid the debt crisis in the Eurozone, Sweden enjoys its Krona's appreciation combined with the 4. Dec decision by S&P to upgrade the rating of Swedbank, the leading retail bank in Northern Europe, to A+ from A, signaling high level of bank's stability. Our expert from Uppsala University, Professor Ali Sina Г–nder, has shared his view on the strength of SEK, its difference from CHF and the potential breakdown of the Eurozone.
1) Scandinavian currencies have been regarded as "safe-haven" for quite a long time. How does Sweden manage to maintain its currency status? Is this partly due to the effective measures executed by the government and stable politics?
Being a safe-haven currency is not a yes-or-no question, but rather a question of degree. The Swedish Krona has most characteristics of a safe-haven currency. A long sustained positive current account balance ensures that Sweden will be immune to shocks to its currency through potential capital outflows. Observing low debt-to-GDP ratio and budget surplus over the past years, one can correctly claim that the Swedish government is doing a good job in keeping its entire economy healthy. However, thickness of money and capital markets is another important characteristic of a safe-haven currency, and Sweden does not have the necessary equipment in that respect.
Market capitalization as well as liquidity rates are considerably lower for Sweden than that for issuers of major international currencies. Nevertheless, size and thickness of the money market are not direct consequences of government policies (at least not in the short- to mid-run). In my opinion, the Swedish Krona owes its success to the Swedish Central Bank's (Riksbank) decision not to tie the Krona to the Euro. This yields immunity to the current turmoil in the Eurozone, and it also gives Swedish policymakers room for successful maneuvers. The merit of floating regime of the Swedish Krona becomes more obvious, if we compare its performance to that of the Danish Krona, which shares similar fundamentals with the Swedish Krona but is tied to the Euro in a narrow band.
2) In September 2011 the Swiss National Bank shocked the markets by tying the Swiss franc at 1.20 against the euro due to a very strong currency which was not beneficial to the country. Do you see the possibility of the same scenario happening in Sweden?
I do not think that this will happen in Sweden. The problem in Switzerland was that the Swiss Franc was too strong so that it started causing two major problems: first, the Swiss international trade was being affected adversely. Hence tying of the Swiss Franc to the Euro solved this problem by preventing the Swiss Franc from appreciating further and reaching uncompetitive high export prices.
The second problem is the credit problem of Swiss banks, which extended credit to foreigners abroad. Further appreciation of the Swiss Franc would have raised significant concerns about solvency of indebted foreign households. Considering the wide spread of such loans, a steady appreciation of the Swiss Franc could potentially be a threat not only to the Swiss banking system but also to foreign economies (e.g. many Hungarian households got such loans).
The Swedish Krona is appreciating, yes, and this has adverse effects on the Swedish exports. Some producers already complain about eroding profit margins due to the appreciation. I am not in a position to judge whether the Swedish Krona is currently under-valued or over-valued.
However, one should keep in mind that Riksbank decided to lower interest rates in 2008, and the Swedish Krona depreciated in response. This was a very smart maneuver by the Riksbank in the wake of the US financial crisis in order to keep the export-driven Swedish economy intact.
I think that the current appreciation of the Swedish Krona can be seen (at least partially) as a recovery from the depreciation of early 2009.
3) If the gloomy forecasts of the Eurozone's collapse materialize, how will the Scandinavian countries be affected?
I find a total collapse of the Eurozone very unlikely. Nevertheless, a more reasonable scenario is that the Eurozone might shrink, removing problematic countries from the Eurozone, and continuing with the "core" members of the Eurozone.
Swedish economy is mainly export-driven. That is, the Swedish economy's performance depends on its trade partners. Scandinavian countries and Germany constitute the main trading partners of Sweden. The same is true also for other Scandinavian countries. Fast recovery of Germany helped Sweden and other Scandinavian countries to have a fast recovery as well. Thus the question here is as follows: how will the German economy be affected by a revision in the Eurozone? I believe that Scandinavian countries will follow the path of Germany in a likely event of Eurozone's revision. I expect Denmark to be affected more adversely, because the Danish Krona is tied to Euro. Sweden and Norway, on the other hand, have better prospects in case of an adverse shock from the "revised" Euro and from the German economy.