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Sweden's Riksbanken Cuts Overnight Rate to -0.25% and Nobody Notices

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10 days ago the Swedish Central Bank cut its overnight deposit rate to -0.25%.
Negative return, guaranteed.
Depoist 100 krona, and in 1 year we'll return 99.75.
The implications of this are staggering, and yet most have been silent.
Sweden had a major bank meltdown in the early '90s, nationalizing all 5 major banks, and then reselling them to the public at a marginal profit. Mission accomplished, and a few extra krona in your pocket to pay for the party after it was all over. I would say this experience means that Sweden, more than any other regulatory regime in the world, has the institutional memory and wariness of banking collapse to make the difficult choices. So they cut rates to less than zero.
I had read everywhere that this was impossible. But they have done it. Why?

1. Exposure to Eastern European Lending - Eastern Europe's housing boom was built on the relatively cheap low interest rates of Western European banks, in particular the Swiss Franc. Something like 42% of all mortgages in Hungary are denominated in CHF. So the decline in these local currencies (Latvia being the worst), has made all regulators w/ large Eastern Europe exposure very nervous. Negative rates will keep the krona cheap, and so make debt service for borrowers working with Swedish banks more liquid.
2. Exports - cheap currency, cheap goods. Everything at Ikea will get cheaper.
3. Encourage Lending - Excess reserves are a measure of bank anxiety. Central banks push down deposit rates and reserve requirements to get banks to start lending. When they begin to lose money, they should start looking elsewhere...anywhere. Shareholder will be less than pleased if they do not. And for the time being, all senior execs are paid in stock, so they will seek new lending markets.

The real implication is that a forward looking, battered-now-healed banking market is charging negative rates. Is this a portent of the near future? Are we going to see all central banks cut their rates to zero in an effort to keep their currencies cheap? Or is this the mother of all moral hazard doubling down strategies? Swedish banks are in trouble, they lent too much to Eastern Europe, and so they need to either find new borrowers who will take over these loans at favorable terms *or* renegotiate w/ their current raft of existing lenders in Eastern Europe, and wind down these loan portfolios ASAP.

Either way...it will be interesting.

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Guest Monday, 25 May 2020