Bloomberg News

Sweden Safer Than Germany as Crisis Upends Bond Market Logic

December 13, 2011

(Updates with 10-year yield decline in sixth paragraph.)

Dec. 2 (Bloomberg) -- Sweden is enjoying its lowest borrowing cost ever relative to Germany as investors reward the biggest Scandinavian economy for cutting its debt to less than half Europe’s average and enforcing discipline at its banks.

“Everybody is basically fleeing the euro area, not Europe,” said Georg Andersen, the managing director of the banking unit of Nykredit A/S in Copenhagen, Europe’s biggest issuer of mortgage-backed covered debt. “The Nordic area stands out as a safe haven.”

Almost two decades after resolving its last banking crisis, Sweden boasts the world’s best-performing bond market. The country, which opted to stay outside the euro, has paid down its debts and imposed stricter controls on its lenders. Sweden’s government made a profit on its 2008 financial rescue, will post a budget surplus this year and pays less than any other European Union member to borrow for 10 years.

Investors are willing to lend to Sweden for 10 and 30 years at interest rates lower than they charge Germany. Borrowing for a decade costs the largest Nordic economy about 40 basis points less, and it hasn’t paid more than the euro area’s biggest economy since September, echoing the discount it got from investors between June 2008 and March 2009.

Lowest Ever

Swedish government securities repayable in 10 years or more delivered a return of 28 percent this year, including reinvested interest and ignoring currency swings, the best of any sovereign debt market tracked by Bloomberg during the period. Swedish 10- year yields relative to similar-maturity German bunds touched the lowest ever on Nov. 25, as the Nordic country’s borrowing costs sank 64 basis points below bunds.

Swedish 10-year bonds yielded 44 basis points less than similar-maturity Germany bunds today, versus 40 basis points yesterday. Swedish 10-year yields slipped 3 basis points, sending the bond to its highest in four days.

Europe’s leaders have failed to solve the common currency’s turmoil 19 months after Greece became the first nation in the bloc to seek external aid to stay afloat. The debt-market hierarchy is shifting as even Germany displays symptoms of becoming ensnared in the turmoil and investors start to question the survival of the euro.

“People are allocating money away from all euro exposures,” said Andreas Halldahl, who oversees the equivalent of $18 billion as head of Swedish rates at Storebrand Kapitalforvaltning AS in Stockholm.

Swedish Success

Sweden’s success lies in part in its focus on income equality, Swedish Prime Minister Fredrik Reinfeldt said in an interview last month. Sweden has the world’s highest tax burden as a percentage of gross domestic product after Denmark. The two countries also boast some of the most equal income distributions in the world, according to the Organization for Economic Cooperation and Development.

Sweden’s financial regulator will require the country’s biggest banks to target capital buffers of at least 10 percent of their risk-weighted assets by 2013, with the ratio rising to 12 percent two years later. The Basel Committee on Banking Supervision sets a minimum target of 7 percent by 2019. Sweden’s government says the more rigorous capital standards are necessary to protect taxpayers from potential losses.

It costs 15 percent less to insure against a default of Nordea Bank AB, based in Stockholm, than it does to guard against a credit event at Germany’s biggest lender, Deutsche Bank AG, credit default swap spreads show. Standard & Poor’s yesterday raised the ratings of SEB AB and Swedbank AB, two of Sweden’s four biggest banks, to A+ from A, citing their access to funding and earnings prospects.

Declining Debt

Sweden’s government debt will narrow to 36.3 percent of GDP this year from 40.2 percent before the global financial crisis started in 2007, according to the European Commission’s latest estimates published Nov. 10. Danish government debt will reach 44.1 percent, compared with a euro-area average of 88 percent, according to the commission. Norway has a $530 billion wealth fund built from its oil income, compared with outstanding debt of 609 billion kroner ($105 billion).

“We have a strong fundamentally weighted allocation to those countries from a fiscal sustainability perspective and from a diversity perspective,” said Gregor MacIntosh, head of rates in Geneva at Lombard Odier Investment Managers, which oversees $37 billion. “They aren’t issuing debt hand over fist unlike some of the other more embattled nations.”

German Breaches

He said he’s “quite overweight” Norway in particular.

Germany’s government will post debt equivalent to 81.7 percent of GDP this year, compared with the euro area’s targeted limit of 60 percent, a level Germany has breached each year since at least 2005.

Sweden, Norway and Denmark all boast current account surpluses, signaling more money is flowing into their economies than leaving their borders. Sweden’s surplus widened to 76.1 billion kronor in the third quarter, the highest tally since the start of 2008, the statistics office said on Nov. 30.

Nykredit is tapping into the influx with a pan-Nordic brokerage in Stockholm, opening this month, to cater to demand for Nordic bonds from South America, the Middle East and China, Andersen said.

“U.S. money market funds are taking money out of the euro area and putting it into Sweden, so liquidity is actually pouring into Sweden and Denmark,” he said.

Budget Surpluses

The eight largest so-called prime U.S. money funds raised their holdings of short-term securities issued by Stockholm- based Swedbank, the biggest lender in the Baltic states, by 72 percent in October, according to data compiled by Bloomberg.

Sweden will post a budget surplus in 2011 for a second year, and the nation’s public finances will remain in the black through the commission’s forecast horizon until 2013. In neighboring Norway, the government expects its general financial surplus to be 13.6 percent of GDP in 2011.

“We are seeing now that investors are also turning away from the traditional healthy euro countries,” said Henrik Henriksen, chief investment strategist at PFA Pension A/S, Denmark’s second-biggest pension fund with $45 billion in assets. “The bottom line is that at the end of the day, the debt crisis is Germany’s problem as well.”

The cost of insuring against a German default climbed 66 percent this year, according to prices of credit default swaps. It costs $98,000 to insure against losses on $10 million of five-year German sovereign debt, up from $59,000 on Dec. 31, data provided by CMA show. Insuring Swedish debt costs $73,000, compared with $34,000 at the start of the year.

Investors also are balking at the European Central Bank’s reluctance to do more to support the euro region, meaning countries with debt-issuance backing from their own central banks are getting a relative boost, Henriksen said.

“Investors are currently drawn to countries that have their own money printer, their own currency and their own monetary policy,” he said. “Right now it’s a relative beauty competition where investors buy what they find to be the least ugly.”

--Editors: Tasneem Brogger, Jonas Bergman

To contact the reporters on this story: Christian Wienberg in Copenhagen at cwienberg@bloomberg.net Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net


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