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But Don’t Rush Out to Buy Kronor: Sweden’s 500% Gamble

Five hundred percent interest rates in Sweden! Where do I sign up?

The Swedish Krona

You can’t. In a move to defend the Swedish krona at all cost against speculators betting on a devaluation of the currency, the Swedish central bank raised its marginal lending rate on Wednesday to a shocking 500 percent. But the rate is imposed only on banks that insist on borrowing extra funds over the next three days. Almost none did.

“It is more or less a fictional rate,” said Arthur Sarman, an economist at Nordbanken in Stockholm. “The market at that rate is so thin that it barely exists.”

The aim of the operation is not to pay rates of 500 percent. It is to dramatically demonstrate the government’s determination not to devalue the krona, and to drive up rates in the money market, making it more lucrative to hold the currency.

Indeed, one-month money-market rates in Sweden jumped to almost 35.00 percent on Wednesday, up from 21.32 percent late Tuesday, and well above a peak of about 25.00 percent last week.

Shortly after the Riksbank announced the 500 percent rate, domestic credit markets closed up shop for the day. “They may shut down if they want,” said the chief dealer of the central bank, Kjell Nordin. “There is only a short time left for trading.”

But the punitive rate, announced in the late afternoon after a boost earlier in the day to 75 percent from 20 percent failed to stop the outflow of currency from Sweden, seems to have accomplished its goal. At least for the day.

“I think this measure is sufficient for now,” Bendt Dennis, Sweden’s central bank governor, said in a radio interview. “The short-term speculators burned their fingers.”

Darren Cullen, a Scandinavian analyst for Salomon Brothers in London, explained what happened. “This stopped the outflow of currency. They made it too expensive to short the currency.” (A speculator “shorts” a currency by borrowing funds today on the hope that he can repay them later at a profit after the currency declines.)

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The Swedish Krona FX & Sentiment

None of Wednesday’s rate manipulations affected rates that touch individuals, such as bank deposit or mortgage rates. And even attempts by institutions to profit from the 30 percent money-market rates carry a risk.

If Sweden, which is outside the formal EC currency grid, is forced to devalue its currency in response to a broad realignment of the exchange-rate mechanism, foreign lenders there would suffer losses when they try to reconvert their krona into other currencies.

“The storm is now increasing to a hurricane over Europe,” Olle Djerf of Nordbanken told Reuters.

Last week, Prime Minister Carl Bildt said he was willing “to go through fire and water to defend the fixed exchange rate.”

On Wednesday, Mr. Bildt called a crisis meeting with leaders of the opposition parties. Several cabinet ministers canceled trips to attend the meeting. Ingvar Carlsson, leader of the biggest opposition party, the Social Democrats, flew home from a meeting in Germany.

“It is the most serious situation we have had on the European foreign exchange and money markets that I can recall,” Mr. Bildt said.

The Market Index of Sweden OMX Stockholm 30

The OMX Stockholm 30 is a stock market index for the Stockholm Stock Exchange. It is a capitalization-weighted index of the 30 most-traded stock on the Nasdaq Stockholm stock exchange. The index started on 30 Sep 1986 with a base value of 125. Wikipedia

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Cory has been a professional trader since 2005, and holds a Chartered Market Technician (CMT) designation. He has been widely published, writing for Technical Analysis of Stock & Commodities magazine, Investopedia, Forbes, Benzinga, and others.