Policy measures in the Nordic countries

This is an update of the research note that we published on 18 March. We have included a special section on regulatory measures.

There is little doubt that the economic impact of the coronavirus and the measures taken against it is very large for the Nordic countries. Denmark has so far taken the harshest measures with large parts of the public sector, schools, restaurants and shopping malls closed at least until after Easter.

Denmark is also the only country in the Nordics where the government is ready to cover part of the fixed costs for businesses negatively affected.

The measures taken so far aim at both preventing bankruptcies and layoffs and developing policy measures to support liquidity and credit markets. So far, there is less emphasis on stimulating demand through large-scale fiscal easing but we might see more of this in order to support a strong recovery after the crisis. The Nordic countries all have strong public finances, strong credit ratings and well-capitalised banks and all are well positioned to use fiscal policy in the crisis.

The Nordic countries are each different. Norway has an exceptionally strong fiscal position but its economy has exposure to both COVID-19 and the oil price collapse. It is characterised by a large high-yield market. Sweden and Norway have been able to utilise their monetary policy and the currencies have depreciated, supporting competitiveness. In respect of credit measures, we highlight that Norway will reopen a NOK50bn government supported credit fund and the Swedish Riksbank has initiated a SEK300bn QE programme in government bonds, Kommuninvest and covered bonds. It is difficult for the Danish central bank to engage in traditional QE due to the currency peg but the 2008 experience shows it can enact measures that will be supportive of the Danish covered bond market. All central banks have introduced liquidity measures to support market functioning, banks and corporates.

Regulatory measures

Across the Nordic countries, counter-cyclical capital buffer (CCyB) requirements have been lowered, providing banks with additional headroom to continue lending to the economy. In Denmark, the CCyB requirement was lowered from 1.0% (due to rise to 2.0%) to 0.0%; in Sweden it was reduced from 2.5% to 0.0%; and in Norway it was cut from 2.5% to 1.0%. Moreover, financial supervisory authorities in the three countries are allowing banks to make use of their liquidity buffers, by providing them temporary relief from liquidity coverage ratio requirements. In Finland, the systemic risk buffer has been removed, which in combination with reduced bank-specific requirements has led to buffer requirements being lowered by 1pp. Also, Finnish banks may benefit from the measures announced by the ECB on 12 March, whereby banks can operate below the Pillar 2 Guidance and are allowed to meet their Pillar 2 Requirement partly with capital instruments. A temporary relaxation of Liquidity Buffer Requirements was also announced.

Download The Full Article