Jan 29, 2013 2:00 PM
Sweden's National Debt Office to lend Central Bank SEK 100 billion
Interesting news out of Sweden this week.
The National Debt Office (NDO) agreed to borrow SEK 100 billion (about 12 billion euros) to strengthen the central bank (Riksbank) foreign reserves. The borrowing will be in foreign currencies and onlent to the Riksbank.
This brings me back to June 2009 when I gave presentations over the course of several days to the central banks of Norway, Sweden and Finland on the Fed's role in the financial crisis.
Each country was considering bolstering their foreign reserves with the intent of being able to provide foreign currency financing to their domestic banks. At the time the forex swaps market was dysfunctional and central banks were considering the possibility of having to provide significant assistance to their banks with foreign currency financing needs. What was surprising to me was that each country had a separate economic/financial regime (Norway--independent currency; Sweden--independent currency w/in EU; Finland--full euro adopter) but were thinking along similar lines concerning this issue.
Engaging the Treasury to finance the reserve accumulation is somewhat unusual but not unique. This is common practice in New Zealand and, closer to home (i.e. Sweden) in Denmark.
Advantages to Treasury borrowing may come from their greater presence and sophistication in the market leading to lower financing costs compared to the central bank; the advantage of the national debt manager choosing the currency exposure and terms that best fit within the overall strategic debt financing framework (perhaps coupled with derivatives to convert currencies to the optimal reserve allocation for central bank purposes); keeping the foreign exchange exposure of the central bank limited compared to what would be the case were the central bank to finance the forex accumulation with domestic currency debt.
As discussed during the recent conference call, this mechanism can also prevent segmentation of the market for a country's sovereign debt. From the perspective of emerging market countries with weak central bank finances, Treasury financing of foreign reserve accumulation can also alleviate some the additional costs associated with forex accumulation from leading to further stress on the central bank balance sheet.