Rui Soares is an investment professional for FAM Frankfurt Asset Management, an independent investment firm
As the FT reported earlier this month:
Hedge funds have cranked up their bets against Sweden’s real estate sector as investors predict higher interest rates will weigh on domestic property prices and expose its vulnerability to tighter bank lending. [ . . . ]
“The closer we look at Sweden the worse things seem to appear,” said James McMorrow, Europe commercial property economist at Capital Economics.
Does it follow that the Swedish economy is in trouble? And even if that was the case, doesn’t it have a very solid balance sheet allowing it to easily overcome and smooth out any short-term, cyclical economic weakness?
At first glance, Sweden and the Nordics in general look solid. When it comes to healthy balance sheets they are in completely different leagues to Greece, Italy, Portugal and Spain, the so-called southern tier European Union states — and over the past 10 years the difference between the two group of countries just grew bigger:
This rather mainstream approach to the quality of a country’s balance sheet overlooks, however, that the private sector has a balance sheet too. Starting with households . . .
. . . and if we add the private non-financial corporate sector, we obtain a rather interesting picture for the total private sector debt by country:
. . . meaning total aggregate debt levels (public and private) put the Nordics on a similar footing to the southern tier:
Surprising? It shouldn’t be. The post-GFC and eurocrisis low interest rate environment created an incentive to take up more debt. However, only those countries with spare debt capacity could take advantage. The Nordics’ private sector — households and non-financial corporations — had debt capacity left in 2011 and made the most of the low interest rate environment, leading to a significant increase in their leverage levels since 2011. And yes, part of it went to finance a real estate bubble boom.
One might now argue that the Nordics run current account surpluses — ie. they are not dependent on external financing — and that solid public balance sheets will allow the governments to step in and stabilise the economy, if needed. These are fair points. Then again, the companies that generate export revenues, and are the source of the current account surpluses, may not necessarily be the ones that have the high levels of debt.
This potential mismatch means that the economic agents who generate the excess savings in the economy could decide to move their money outside of the country instead of refinancing the local economy. Without capital controls, even current account surpluses are not absolutely effective in preventing financial crises.
As for the clean public balance sheets, these can easily become dirty ones once automatic stabilisers and bailouts of all sorts start to kick in among a rapid and severe economic downturn.
In 2007, according to IMF data, Spain’s public debt accounted for 36 per cent of GDP and total private sector debt (ex-financial sector) for 276 per cent. In 2021, Sweden’s public debt accounted for 37 per cent of GDP and the total private sector debt (ex-financial sector) for 285 per cent.
Are the Nordics the new GIPS?
