Debt Berg On The Baltic—–Sweden’s NIRP Bubble Is Nuts


Scandinavian NIRP Bubble

A recent article at Reuters indicates that Sweden’s central planners are beginning to worry slightly about the bubble they have caused in their (so far) vain attempt to destroy the purchasing power of the Swedish crown in terms of consumer goods. They have instituted a giant QE program and reduced central bank lending rates below zero (an economic policy perversion if ever there was one). So the failure is certainly not for lack of trying, as the charts below illustrate.

While the “well-intentioned” plan to impoverish Sweden’s consumers by reducing their real incomes has failed, relative prices have of course been distorted enormously. Price inflation is simply showing up in asset prices, primarily real estate prices, in which a bubble of truly breathtaking proportions is underway.


1-Sweden, property pricesZIRP and later NIRP-induced lunacy in Sweden, as evidenced by a parabolic increase in property prices. Note that these data are as of Q1 (the most recent chart we could find). In the meantime, prices have shot up further. The latest annual rate of change amounts to 20% – click to enlarge.



A little color from Reuters:


“House buyers in Sweden have never had it so good, at least by some measures. But cheap credit and spiraling prices may be creating a bubble – one that could send the country’s economy reeling when it bursts.

Sweden now has one of the fastest growth rates of any developed economy. Inflation is near zero and official interest rates are below zero. Home buyers can take advantage of interest-only loans and a variety of tax breaks.

On the other hand, consumer debt is about 175 percent of disposable income, one of the highest rates in Europe. Housing prices keep rising – apartments in Stockholm cost around $6,350 per square meter, on a par with London’s $6,750. Most Swedes would take a century to repay mortgages at current rates.

“The prices are just crazy,” said 37-year-old Cathrin Wentzel.


(emphasis added)

It would “take most Swedes a century to repay their mortgages at current rates”? Meaning, at barely perceptible rates of interest? With household debt at 175% of GDP? Good luck ye Vikings!

More from Reuters:


The Riksbank’s decision this week to keep rates lower for longer just extends a bonanza of cheap money that has fueled the real estate prices and borrowing. But the central bank is caught in a dilemma.

Leaving rates so low only encourages home buyers. But raising them enough to tamp down the housing frenzy would also slow an inflation rate that is already flirting with zero and has dipped into outright deflation.

The concern is that Sweden might end up with a local version of the 2008 financial crisis. Homeowners saddled with enormous mortgages might see the value of the homes plummet. They would cut back on spending, try to save more – and hobble the economy.

In the last few months, concerns about a bubble have reached a fever pitch as house prices shot up still further. A government failure to clamp down on lending criteria has fed a 20 percent annual rise in the cost of apartments.

Most bidding in Sweden for flats and houses is done by text messages. Potential buyers scurry off from office meetings or dinner parties to punch in their latest offer – often upping their bids by $10,000 to $20,000 a text. Mortgage borrowing grew at its fastest pace in more than 4 years in September.

Even so, the Riksbank has slashed rates to record low -0.35 percent to rekindle inflation and may go even lower.


(emphasis added)

The alleged “dilemma” the central planners have created for themselves is of course based on an absolutely bizarre theory that holds that it would be somehow bad if consumers were to enjoy a tiny increase in the purchasing power of their income and savings. This Keynesian balderdash has been at the root of a series of credit and asset bubbles around the world that will eventually either lead to a devastating financial and economic crash, or alternatively a hyperinflationary crack-up boom (or maybe even both).

What is not going to happen is anything good. That ship has sailed long ago. There is no way this monstrous bubble can be “soft-landed” – it either keeps expanding or it crashes. The governor of Sweden’s Riksbank, Stefan Ingves remarked:


“We have scored an own goal of sorts in not dealing with the housing market properly in Sweden, and in the long term that threatens economic development.”


Maybe they should have thought of that before they did this (how hard could it have been to forecast the effects of this moronic policy?):


2-sweden-interest-rateSweden’s central bank lending rate – it currently stands at minus 35 basis points, which is utterly perverse, as such a thing as negative time preference doesn’t exist. If it did, it would mean that the categories of “sooner” and “later” no longer had any meaning for human beings – click to enlarge.


A Giant Accident Waiting to Happen

As might be expected, the introduction of negative interest rates and a QE program that has just been expanded further on October 28, have led to explosive money supply and credit growth in Sweden. Evidently the recognition of having scored an “own goal” wasn’t sufficient to stop the central planners from making an already quite scary situation even worse.


3-Sweden, money supplySweden, monetary aggregates M3 (black line) and M1 (red line). The M1 data are a bit more up-to-date and likely a better representative of the actual amount of money in the economy (broader aggregates tend to include credit transactions and time deposits that are not strictly money or part of the money supply in the broader sense). Note the most recent renewed upward spike in M1 – click to enlarge.


What we haven’t seen discussed anywhere is the fact that while household debt at 175% of GDP is already at an extreme level seldom seen in economic history anywhere, corporate debt in Sweden is even greater – by an impressive margin to boot. In other words, should the cost of credit ever increase, this giant private sector debt-berg will likely implode with a bang.


4-Sweden creditHousehold credit (blue line) and corporate credit (red line) in Sweden. Overall, private sector credit in Sweden amounts to more than 10 trillion Swedish crowns. This compares to GDP of 3.9 trillion crowns, for a private sector debt to GDP ratio of around 260% – click to enlarge.


The fact that the situation has become an uncontrollable bubble that is probably very close to bursting is illustrated by the closing paragraphs of the above mentioned Reuters article. This sheds light on how extreme the underlying bubble psychology has become by now. Typically this is observed near the final stages of a boom:


Reforms to reduce the risk of a bubble have been uneven. Until 2010, Swedes could borrow 100 percent of property purchase prices and some borrowed more to fund renovation. A new 85 percent limit is often bypassed by unsecured loans.

Four of 10 Swedes still do not pay off their loans at all, encouraged by tax breaks. The center-right, in power from 2006 to 2014, sold off public housing and abolished real estate taxes, helping to push up prices.

The Riksbank and retail banks have called for a reduction in mortgage tax breaks and other steps. But even small measures – such as a government proposal to tightening mortgage rules for new borrowers – has run into legal difficulties.

Buyers are ignoring talk of a bubble to grab a dream home before the window of opportunity closes.

“I talked with a real estate agent about that and he said it was just talk,” Wentzel said.


(emphasis added)

It is quite astonishing that the author of the Reuters article pretends throughout that there actually is no bubble yet, but just the “risk” of one forming. There is no longer any “reform to reduce this risk”. The only question that is left it whether the credit expansion will be abandoned voluntarily or involuntarily at a later stage. Once this happens, the bubble will implode. The longer it takes, the more severe the denouement will be.

However, apart from stunning little details like “four in ten Swedes don’t pay off their loans at all”, what is really illustrating the psychological momentum are the sentences highlighted at the very end, such as “buyers are ignoring talk of a bubble to grab a dream home before the window of opportunity closes.”

There is no “window of opportunity” that is closing. The only opportunity that is left is that of not losing money by avoiding to get caught up in the euphoria and thereby sidestepping the eventual crash. However, one has to suspect that the safety of Sweden’s banking system has been severely compromised, so the people of Sweden may one day well come to curse the fact that their country is a trailblazer in the “cashless society” sweepstakes.

And naturally, real estate agents are waving bubble concerns off by insisting it is “all just talk”, which is fatally reminiscent of the US NAR (National Association of Realtors) and its former chief economist David Learah. As the Chicago Tribune remarked: “In October 2005 Lereah was busy calling the bubble believers ‘Chicken Littles.’” The bubble in home prices topped out less than a year later, and another two years later it had morphed into the biggest financial catastrophe of the post WW2 era.

But it’s going to be different in Sweden, right? Incidentally, according to Bernie Sanders the Swedish socialist central planning model should be emulated by all.



Sweden and the other Scandinavian bubble countries Denmark and Norway are small economies and the danger of an implosion of their credit and housing bubbles is not regarded as a reason for concern elsewhere. When the time comes, we are fairly sure this will be the refrain. However, this would essentially be the same tune that was heard when Thailand’s currency and economy went into a tailspin at the beginning of the Asian crisis.

Meanwhile, if we were a citizen of Sweden with savings to protect, we’d be very busy making plans right now with the aim of keeping them safe before it becomes an urgent imperative obvious to all. All sorts of contingencies have to be considered in this case, including the possibility of a severe banking crisis and eventually a fiscal crisis as well (the temptation to attempt bailouts will be great). What we certainly wouldn’t do at this juncture is follow the advice of real estate agents.


Charts by: St. Louis Federal Reserve Research, TradingEconomics