Swedish household debts do not constitute any immediate threat to financial stability. But measures are required to make the system more robust to shocks and to make the lending markets work better for households and firms. These are the general conclusions in the Report from the SNS Economic Policy Council 2015, The Swedish Debt.
Swedish household debts do not constitute any immediate threat to financial stability. But measures are required to make the system more robust to shocks and to make the lending markets work better for households and firms. These are the general conclusions in the Report from the SNS Economic Policy Council 2015, The Swedish Debt.
After the financial crisis, the risks of high debts have come into focus. But a high level of debt can also be a sign of well-working financial markets. It makes it possible for an entrepreneur without own fortune to realize his productive ideas and for the young household to buy its first home.
Since the mid 1990’s, there has been an increase in Swedish household debt from 90 per cent of the households’ disposable income to the current 175 per cent, while company debts have remained relatively unchanged. The conclusion of the Economic Policy Council is that neither household debts nor company debts constitute any immediate threat to the stability of the Swedish financial system. Since Swedish households have full personal responsibility for the payment of their loans, they will as long as it is at all possible try to deal with possible problems by decreasing their consumption and selling assets. Therefore, it is not likely that bank losses on loans to households become particularly large.
In contrast, high debts might threaten the stability of the economy, if households with high debts in a tight situation might have to clean up their economic situation through increased savings. Thus, the Economic Policy Council argues that improvements in regulations and frameworks are needed in order to decrease the costs for possible future crises, both for the economy as a whole and for individuals and companies.
MORE NEUTRAL TAXES. The current tax regulations favour debt as compared to funding with own capital. Taxes should be made more neutral, for example by limiting the right to deduct interests or an increase in the estate tax.
SAFEGUARD POSSIBILITIES TO RENEGOTIATE DEBT. In the crisis of the 1990’s, banks gave considerable respites with interest payments to borrowers who had become insolvent. New regulatory frameworks for banks run the risk of making it more difficult to renegotiate debt. It should be investigated how the possibility to renegotiate debt can be safeguarded.
MORTGAGES WITH SHARED RESPONSIBILITY. The risk for economic strains in the form of unemployment and falls in house prices is currently solely held by borrowers. It would be desirable to offer loans where the lender bears a larger part of these risks. For example, the payment liability could be limited if the borrower is hit by unemployment or a fall in the value of her home.
FACILITATING THE RECONSTRUCTION OF COMPANIES. It is important to make it possible for long-term viable firms that encounter temporary financial problems to continue with their business. A reformed bankruptcy law might facilitate the reconstruction of companies and, at the same time, support the emergence of a Swedish market for government bonds and make Swedish companies less dependent on banks.
“With this report, we would like to broaden the discussion from a one-sided focus on detailed regulation of household debts using a ceiling on loans and amortisation requirements to the basic questions of what rules and frameworks that are required to construct a lending market that works well in both good and bad times”, according to Peter Englund, chairman of the SNS Economic Policy Council 2015.
The SNS Economic Policy Council 2015 consists of PETER ENGLUND (Chairman) and BO BECKER, both Professors of Finance at the Stockholm School of Economics, TORBJÖRN BECKER, PhD in Economics at SITE, Stockholm School of Economics, MARIEKE BOS, PhD in Economics at SOFI, Stockholm University and PEHR WISSÉN, Adjunct Professor of Finance at the Stockholm School of Economics and SIFR.
About the report
The report was presented at an SNS seminar and at the Modern Museum on January 15, 2015.
”It is good that the report deals with questions on crisis management. However, I do think that we need to start acting in a more preventive way in order to avoid crises in general. Thus, I consider that the work on household debt moves in the right direction; for example the Ministry of Finance is working on this question.”
CECILIA SKINGSLEY, Deputy Governor of the Riksbank
”Written in a balanced and interesting way. I draw similar conclusions as the Council.”
MAGDALENA ANDERSSON, Ministry of Finance
Contact
STEFAN SANDSTRÖM, Research Director at SNS, stefan.sandstrom@sns.se or phone:+46-8-507 025 64.