Government newsletter - The debt crisis - what happens now?
04 November 2011

The debt crisis - what happens now?

Picture of coins and money bills. Photo: Lars Ternblad/Johnér.

Every day on TV and in the papers we can see new reports about the debt crisis. Greece has serious problems, but so do other EU countries. Sweden is standing strong in these turbulent times, but there are undoubtedly a lot of people who are concerned about developments nonetheless. Here we clarify a few things.

The risk of a domino effect requires fast measures

In the wake of the problems that several eurozone countries are facing in their public finances, turmoil in the financial markets has grown. If the most heavily indebted countries in Europe cannot pay their debts, there is a risk that the European banks that have lent the money will have problems. And since it is not certain whether these countries can afford to bail out their banks, the risks are greater still. Today's financial systems are so interlinked that crises quickly spread between countries. We saw this, for example, in 2008 when the problems in the US housing and financial markets very quickly had an impact on jobs and growth here in Sweden too.

It is this risk of the crisis spreading that means that the problems require common agreements, but also solutions within each country.

Common agreements within the EU

At the latest meeting of eurozone leaders at the end of October, an agreement was reached whereby Greece's debts to lenders in the private sector would be reduced by a half. It was also agreed that the fund that had been created to provide financial support to countries with problems would be increased fivefold.

At the same time, stricter requirements were introduced with regard to how much money banks must have. The aim is to try to increase confidence in the banking sector. The capital injection needed in certain banks must occur primarily through private funds, including limits on dividends and bonuses.

In addition, the coordination and supervision of economic and fiscal policy within the EU will be strengthened.

Euro bills. Photo: Johnér.

When news emerged of the referendum in Greece on the crisis package, uncertainty over Greece's crisis measures and future payments followed. This may mean it will be more difficult and will take longer to solve Greece's problems.

Sweden stands relatively strong

Sweden is a small and open economy. We have a high level of trade with other countries and our banks have close cooperation with other banks in the rest of the world. If growth slows down in the global economy, it affects us too. But there are two reasons to believe that Sweden has every chance of coping better than most other countries.

Firstly, we have stable public finances and considerable safety margins, thanks to our rigorous fiscal policy framework and the Government's unequivocal policy of good order and caution concerning taxpayers' money. Almost all the affected countries lack this.

Secondly, Sweden now has a framework for financial stability. This framework is intended to help reduce the risk of serious problems arising in the financial system. But it is also intended to limit the effects if a crisis were to emerge after all. In short, the framework is made up of a strengthened regulatory framework to reduce risk-taking and improved supervision, including of banks that are active in several countries. In addition to this, there is a more effective system for being able to handle crises and a strengthened state guarantee for deposits in bank accounts.

Swedish crisis management is based on the principle that taxpayers' money must be protected, whilst ensuring that financial stability is safeguarded. This is why the Swedish state will not only take on bad assets if a bank risks collapse; it will also actually take on ownership of the bank. In this way, taxpayers will also share in the increase in value when stability returns. It would also give the Government the possibility of limiting dividends and bonuses from banks that receive support.

Measures in Sweden

A great deal has been done, but work remains to safeguard stability. This is why the Government has proposed more resources to Finansinspektionen (the Swedish Financial Supervisory Authority) to supervise the financial markets. The Government is also working to make capital adequacy rules for Swedish banks more stringent. More capital makes banks better equipped to withstand financial turmoil.

Ways of further strengthening the regulatory framework are currently being examined. This concerns, partly, how the contribution to the stability fund - the banks' insurance policy - could be based on the risks the banks take. This means that the banks that jeopardise the stability of the system would pay the highest contribution.

The crisis will affect us in Sweden, but we do not yet know to what extent. It depends how well the countries of Europe handle the crisis and how well prepared we are for handling the effects of the crisis.

Sweden's past experience of crises has meant that the Government has laid a foundation enabling Sweden to stand stronger than many other countries. The Government will now continue to take responsibility for Sweden and build on this foundation together with other EU countries.

To subscribe or change your subscription, please visit Subscribe to news

The Government
SE-103 33 Stockholm
 work+46 8 405 10 00
email to the Government