Why is Sweden Facing a Currency Crisis?

Sweden is not really a country that comes to find when one talks about finance or currency trading. The Swedish Krona is a relatively small and insignificant player in the global market. Trading in Swedish Krona accounts for less than 2% of the global currency trades. However, the Krona is what many call a counter currency. This means that the Krona moves in the opposite direction to the world in general and Eurozone in particular. When the Eurozone currencies become stronger, the Krona becomes weaker and vice versa.

This year has been the worst year for the Swedish Krona is the past two decades. Amongst the major currencies, it has been the clear loser with the worst performance. In this article, we will look at some of the factors which have resulted in the downfall of the Swedish Krona.

Causes of Currency Crisis

• Low-Interest Rates: The Swedish central bank is famous for not raising interest rates. The rates were dropped in 2009 to reach -0.5%. Sweden was one of the first countries in the world to experiment with a negative interest rate. Now, after a massive gap of 10 years, the interest rates have been lowered to -0.25%. The rates are still in negative territory. Unlike the Danish Krona, the Swedish Krona is not really pegged to any external currency. Hence, Sweden has full autonomy to manipulate currency prices and is using the same. Many critics are worried that this constant devaluation may actually end up bringing in a currency crisis. However, the Swedish central bank seems confident. This is the reason why they are continuing with lower interest rates. The markets are fairly confident that the Swedish bank will not raise interest rates. This is the reason why the Krona continues to slide down. Markets expect the interest rates to remain in the negative territory for quite some time in the foreseeable future.
• Higher Inflation: The Swedish central bank is very sensitive to interest rates. Unlike the Federal Reserve or the European Central Bank, the Riskenbank does not have multiple objectives. Instead, the stated objective of the Swedish central bank is to keep the inflation as low as possible. The Swedish government charges a lot of taxes. However, it also gives out a wide variety of health and unemployment benefits. The Swedish culture is such that people do not expect the wages to increase too much. This is the reason why they are also opposed to an increase in prices. The rate cut from -0.5% to -0.25% has caused an increase in prices. The Swedish government wants to avoid further increases at all costs. Hence, the rates may remain stable in order to enable the government to meet its inflation target.

Effects of the Currency Crisis

• Higher Exports: The Swedish economy is very sensitive to exports. There are many global companies such as Volvo, H&M, and Ikea which have the headquarters in Sweden. A lower currency rate benefits the export sector. This is because the goods become cheaper for buyers from other countries. Hence, Swedish goods have become more attractive. Since the entire economy of Sweden is based around exports, and the export sector is benefitting, there is a silver lining to what is being called a “currency crisis of grave magnitude.”
• Local Tourism: A lower prices Krona not only makes Swedish goods cheaper, but it also makes travelling to Sweden cheaper. Hence, Sweden will now be on the map of many more tourists. Since tourism is a high margin business, this is good news for both Swedish businesses and the Swedish government. Businesses like hotels and cafes can gear up for a busier than usual season. Also, the government will make a huge amount of money from this policy since every good and service is heavily taxed in Sweden.

• More Expensive Imports: The only community that seems to be complaining is the importers. An expensive currency means that the import bill has just shot up. This has some very interesting implications.

  Firstly, consumers will find that some goods around them have become more expensive whereas others have not! The ones with raised prices will be imported goods. This could be good news since the price differential will make people switch from imported goods to domestically manufactured ones. If this happens, the local industry is likely to receive a stimulus from this currency crisis.

  Secondly, it needs to be noted that most imports are actually a part of Swedish exports. For instance, the Volvo car is a Swedish product. However, lots of spare parts which are used in the manufacture of the Volvo are imported. Hence, expensive imports are also threatening the competitiveness of Sweden’s fledgling export sector.

• Export of Capital: The problem is that Sweden is not only exporting goods and services but is also exporting capital to other countries. Swedish borrowers are flush with cash because of low-interest rates. Hence, they are borrowing money at this attractive rate and investing in European investments where the yields are higher. This is the reason why the Krona is falling when the rest of the world’s currencies are rising. The stronger the Euro becomes, the higher the Euro-dominated yields become. Hence the loop will continue as people will continue to export capital driving the price of Krona lower and lower.

The bottom line is that there are mixed reactions on the downfall of the Krona. Some are perceiving at as a positive event whereas others are perceiving it as a negative event.

Authorship/Referencing - About the Author(s)

The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.