By Love Liman and Rafaela Lindeberg
Swedenâs central bank may need to have some of its age-old laws changed if itâs to act on a pledge to do âwhatever it takesâ to save the economy.
The Riksbankâs 352-year history gives it the distinction of being the worldâs oldest central bank. But the legislation governing it has yet to catch up with the kind of policy it needs to deliver to address the crisis triggered by Covid-19.
Specifically, the Riksbank doesnât have the legal right to buy bonds issued by companies, even though itâs made clear itâs ready to do so as part of a recent package of emergency measures.
âThe intention of the current Riksbank Act doesnât allow the bank to make outright purchases of corporate bonds or other private securities on the primary or secondary markets,â said Niklas Schullerqvist, secretary to the parliamentary committee charged with overhauling the bankâs policy framework.
So far the Stockholm-based central bank has bought 5.6 billion kronor ($ 568 million) of corporate commercial paper as part of an emergency quantitative-easing plan. But itâs refrained from buying corporate bonds — an important source of financing in the biggest Nordic economy — despite repeated assurances it will so.
Schullerqvist says the Riksbank needs to consider European Union legislation on state aid as corporate bond purchases âmay be considered supporting some specific parts of the economy.â
Riksbank spokesman Tomas Lundberg said the bankâs legal team is looking into the matter, but wouldnât comment further because âitâs an ongoing process.â
Shape of Swedenâs Bond Market
In a recent interview with Bloomberg, Riksbank Governor Stefan Ingves said purchases of investment-grade bonds are âcertainly on our agenda.â He also said âthere are some legal issues when it comes to buying into the primary market.â
Swedenâs primary bond market is a vital source of funding for the countryâs businesses. And with record-low borrowing costs and a growing investor base flush with cash, the marketâs growth has increasingly shaped Swedenâs economy.
But the market has been turned on its head since the Covid-19 crisis hit. Investors panicked and tried to redeem their cash, prompting 35 fixed-income funds to shut their doors. Even so, clients withdrew record quantities of cash and a spike in yields locked out all but a handful of top rated borrowers.
In April, Swedenâs syndicated public bond market only saw corporate issuance from investment-grade companies such as Volvo Group, Industrivarden AB and Scania CV AB, as well as state-owned entities including Jernhusen AB, Akademiska Hus AB and Sveaskog AB.
The crisis thatâs hit Swedenâs corporate bond market has drawn pleas from the investor community for the Riksbank to intervene before itâs too late.
The Riksbank âshould support new money rather than being very active in the secondary market,â said Daniel Sachs, chief executive at credit manager Proventus Capital Management AB.
Magnus Nilsson, founding partner of Nordic Cross Asset Management, says that a âfirst stepâ toward making it easier for struggling businesses to access funding âwould be for the Riksbank to get involved in the primary market for investment grade bonds.â