If Europe was a school playground, Sweden would undoubtedly be the kid who is both well liked and an academic achiever. The country has managed to escape the irritation that Germany has faced for doing “too well”, while celebrating low public debt and a growth rate that has outpaced other members of the EU and the US since the early 1990s.
If Europe was a school playground, Sweden would undoubtedly be the kid who is both well liked and an academic achiever.
The country has managed to escape the irritation that Germany has faced for doing “too well”, while celebrating low public debt and a growth rate that has outpaced other members of the EU and the US since the early 1990s.
In particular, Sweden’s economic growth mainly reflects productivity gains in the areas that are most exposed to international competition: manufacturing business and financial services, which together account for only about one-third of the nation’s economy.
While other areas in Europe struggle with tight credit conditions and the drying up of available liquidity, it seems as though Sweden is escaping with no cuts or bruising.
Ulf Norén, global head of sub-custody at SEB, agrees that the eurozone crisis has had a limited effect on the country. “It is my impression that quality borrowers still can obtain sufficient funding and we see very few signs of typical effects like assets being priced lower than their fundamental value.”
He adds: “The reduction in market participants seen all over Europe can, again, be explained by tough competition and eased accessibility. The stronger Basel requirements for Sweden might have an accumulative effect also in this field but the warning flag is not raised very high, and the colour of the flag is not very red.”
“We are in this respect much more worried what will happen once all initiatives that call for collateralisation will kick in. Our forecast is that collateral will be a commodity in short supply and the effect of that will indeed be a drying up of collateral, and also the creative construction of collateral that seemingly will look safe and secure but when dissected will be scarily like many instruments that in the beginning of this latest crisis were carrying the epitaph ‘junk’.”
One way that Sweden is keeping its nose clean is through conservative exposure. Norén says: “I do not want to mention particular countries but as a general observation the caution level towards exposure of activity in areas or products that might come, or already are, under severe pressure is naturally heightened. Any situation that potentially might lead to the imposition of capital controls, bank defaults (with the risk of payment not reaching the intended beneficiary and other obligations not being met), and devaluation/conversion risks in a sovereign default or euro exit scenarios must of course be closely monitored. It is very difficult to quantify the likelihood of these scenarios occurring or the economic impact. Therefore, exercising judgment is very important.”
A clear way forward
Implementation of central counterparty (CCP) clearing in all Nordic markets is still trekking on at a steady pace, says Norén. “The clearing situation is definitely improving by corporate moves where SIX x-clear has acquired Oslo Clearing and by the combination of EuroCCP and EMCF. We do expect these move to be good for integrated efficiency needs across markets, and to provide a good start of a scene where CCP’s can be judged to act in a sustainable competitive environment.”
A perhaps unwelcome neighbour to this is the continuous squeezing of custody fee margins and the so-called return to ‘cafeteria pricing.’
“The long-term trend says unbundling … but it will not be either or,” says Norén. “The nature of business and the ability to allocate and re-distribute costs will determine how the fee picture will look. I personally think that we will look at a series of models: As is (basis point and transaction fee), a ‘totally’ unbundled model—reminiscent of the ones used by infrastructure providers—capped fee models, fixed fees in absolute numbers, and models that are a mixture of all these.”
“It is important that agent banks defend their commercial value and, by doing so, adopt to the clients’ demands on what they actually are willing to pay for. In that context, the local influencing role must increase, advisory functions should be introduced, and the operational environment must become as close to error free as possible, and be very cost efficient as well. Agent banks are mitigating and absorbing substantial levels of risk on behalf of its client base and this need to be reflected in pricing. I would not be overly surprised if the cost of supplying intraday liquidity to a greater extent will have to be a part of future fee exercises.”
