People sit in a restaurant in Stockholm on May 8, 2020, amid the coronavirus COVID-19 pandemic.
Despite resisting a lockdown on its citizens and businesses amid the coronavirus pandemic, Sweden’s banks remain vulnerable to credit losses, the country’s central bank warned on Wednesday
“Many Swedish companies have seen a sharp decline in their revenues and are therefore having difficulty paying their expenses,” the Riksbank said in its Financial Stability Report 2020.
“This is affecting both economic growth and unemployment, and there is a risk of the crisis spreading to the banking sector in the form of credit losses. As in other countries, the crisis has led to the functionality of financial markets in Sweden deteriorating,” it noted.
The Riksbank said that while Sweden’s financial system was functioning satisfactorily for the time being, if the coronavirus crisis becomes prolonged, the risks to financial stability will increase.
“Without further economic policy measures, credit losses in the banking sector then risk increasing to such an extent that banks may have problems maintaining credit supply,” it said.
In such a situation, further public‐sector measures may be required to provide support to credit supply and to manage problems in the banking sector. The central bank said it was ready to contribute with any necessary liquidity.
Unlike the majority of its European counterparts, Sweden’s government opted against implementing a strict lockdown, instead asking its citizens to abide by mostly voluntary measures to stop the spread of the coronavirus.
The policy has been controversial and Sweden has seen a higher number of coronavirus cases and deaths than its Nordic neighbors. Sweden has recorded 30,799 cases as of Wednesday, and 3,743 deaths, according to data compiled by Johns Hopkins University. Denmark, in contrast, has recorded 551 deaths, Norway 234 deaths and Finland 301 deaths.
There are also signs that the economic benefits of no lockdown have not been as significant as hoped. In April, the central bank released bleak predictions for the country’s economic outlook in 2020, and outlined two possible scenarios.
In the first scenario, it said gross domestic product (GDP) could contract by 6.9% in 2020, before rebounding to grow 4.6% in 2021. In a more negative prediction, it predicted that GDP could contract by 9.7% and a recovery could be slower, growing by just 1.7% in 2021.
In the first scenario, the Riksbank predicted unemployment could reach 8.8% in 2020, from 7.2% currently, and in the worst-case forecast could hit 10.1%. It maintained those forecasts in its report Wednesday.
Sweden’s central bank has not cut interest rates during the coronavirus pandemic, as other central banks have done. However, it expanded its asset purchase program in March to support credit supply in the country and introduced a loan scheme to help struggling businesses.