Eurozone: Central Bank Swap to Sweden, 2007

The purpose of these facilities was to contain “global contagion and reduc[e] systemic risk and spillover effects on euro area markets” (ECB 2014, 75). The ECB was also looking to “support various measures taken by these central banks” to be able to improve euro liquidity conditions in their domestic markets (ECB 2009b, 103).

The ECB and Riksbank created a swap line in December 2007 to “facilitate the functioning of markets and provide liquidity in [euros] in case of adverse developments”(ECB 2007b). A memo to the Executive Board of the ECB discussing the ECB-Riksbank swap agreement states that its “draft swap agreement has been closely modelled on the text of the existing swap agreement with the Swiss National Bank and is also similar to the one with the Bank of Japan” (ECB 2007b, 1).

Under the agreement, the ECB could lend up to EUR 10 billion to the Riksbank in exchange for krona (ECB 2007b).

Sweden’s local banks had been experiencing increased credit risk due to a rapid expansion in lending by December 2007 (Bergman 2007c). In a November 2007 speech, Riksbank Deputy Governor Nyberg said to expect “more bad news from United States and Europe” as there was considerable sensitivity to new negative information in the markets (Bergman 2007b).

The ECB carried out a series of liquidity management actions between July 2007 and January 2008 to provide additional support through long-term refinancing operations (LTROs) of EUR 60 billion per month. The ECB also established a swap line with the US Federal Reserve in 2007, which was activated for the first time in December 2007 and renewed in January, 2008 (ECB 2008).

The ECB’s liquidity measures in 2007–2008 included streamlining rates on standing facilities, continuing LTROs, addressing the lack of eligible collateral, and providing dollar and Swiss franc liquidity through swap agreements with the Federal Reserve and the Swiss National Bank (ECB 2008). The ECB also signed euro swap agreements with central banks of other non–euro area member states such as Latvia, Denmark, Hungary, and Poland (ECB 2014).

The ECB had the legal power to establish such a facility through Article 105(5) and Article 23 of the Annexure to the Treaty^FThe Treaty on European Union (TEU, or Maastricht Treaty) was signed on February 7, 1992, and entered into force on November 1, 1993 (EP 1993).. Establishing the European System of Central Banks (ESCB). The Riksbank had the legal authority under Chapter 1, Paragraph 2 of the Sveriges Riksbank Act (ECB 2007b).

ECB President Jean-Claude Trichet and Riksbank Governor Stefan Ingves signed the ECB-Riksbank swap agreement on December 20, 2007 (ECB 2007b).

A draft swap agreement prepared after discussions between the market operations and legal departments of the two central banks was directed to the ECB Governing Council (ECB 2007a). The Riksbank asked the ECB to sign the swap agreement in advance, similar to the ECB’s agreements with the Swiss National Bank and Bank of Japan and in contrast to its agreement with the Bank of England, which the parties prepared to be ready in case of need but did not sign in advance.

The Riksbank opened a krona-denominated account for the ECB for the implementation of the swap agreement. The Riksbank was responsible for both initiating the draws under the swap and maintaining records of the ECB’s balances in the krona account on a per-use and annual basis (ECB 2007b).

A memo prepared by the Executive Board of the ECB for the Governing Council regarding the proposed swap agreement states that “it is not intended to make the text of the swap agreement or the fact that the ECB and Sveriges Riksbank have signed such an agreement public” (ECB 2007b, 2). This memo was prepared after discussions between the market operations and legal departments of the two central banks.

The ECB communicated that the goal of the swap line was to “preserve macroeconomic and financial stability” and “improve liquidity in short-term euro markets” (ECB 2009b, 94).

The Riksbank in its 2008 annual report disclosed that it had entered into an agreement with the ECB “with respect to lending in euro in exchange for Swedish kronor” and said that “no amount is included in the agreement” (Riksbank 2009b, 76).

The Riksbank was the only eligible borrower under its swap agreement with the ECB (ECB 2007b).

The swap agreement between the ECB and Riksbank stipulated a maximum size of EUR 10 billion at any given time (ECB 2007b).

Transaction procedures for the swap transaction stated that the Swedish central bank was responsible for initiating a request to draw on the swap, with the ECB responding on the same day as the request (ECB 2007b). The ECB could respond to the swap request at the latest on the business day following the receipt. The Riksbank was expected to agree on terms with the ECB on the day of the swap transaction after “confer[ring] by telephone” and confirming through an “oral agreement by means of a SWIFT message”(ECB 2007a). This agreement was to include details on the amount, value date, exchange rate, maturity date, and relevant interest rates. The ECB credited euros to the Riksbank’s account with the Deutsche Bundesbank in Frankfurt on the agreed date, and kronor were credited to the ECB’s local account in Sweden.

The Riksbank drew on the swap line only once, to temporarily support its foreign currency reserves. The Riksbank in May 2009 had decided to bolster its foreign reserves by SEK 100 billion, financed by government borrowing through the Swedish National Debt Office (Riksbank 2010). The Riksbank borrowed EUR 3 billion from the ECB under the swap line to temporarily support its foreign exchange reserves while the government’s borrowing was in progress (Riksbank 2009a). The Riksbank needed to maintain high reserves due to Swedish banks’ reliance on funding in foreign currency. The agreement with the ECB would have also allowed the Riksbank to draw on the swap line to provide euro liquidity assistance to Swedish banks.

The 2007 agreement allowed the Riksbank to borrow a maximum of EUR 10 billion for a maturity of up to three months for each swap draw (ECB 2009a). The Riksbank borrowed euros once under the agreement, in June 2009, and repaid that loan in September 2009 (Riksbank 2010).

The effective exchange rate for the transaction was the market spot rate, with the ECB earning annual interest on the euro provided to the Swedish central bank. The euro interest rate paid by the Riksbank was “calculated on a 360-day basis from the value date to the maturity date” (ECB 2007a). The Riksbank charged no interest or fees to the ECB for maintaining the krona account balance (ECB 2007b).

The balance sheet implications for the ECB from the swap lines were similar to those in past agreements. If the swap line was not activated, the ECB did not need to record an “off-balance sheet item” (ECB 2007b). If the swap line was activated, the increase in foreign exchange reserves was reflected on the ECB’s balance sheet and the forward leg of the transaction was reflected off the balance sheet (ECB 2007a).

The agreement provided a set-off clause in the case of default, which allowed the non-defaulted party to “set off any obligation it may owe” against the currency held by the defaulted party (ECB 2007b, 5).

The Riksbank in the swap agreement stated that it would use its euro-denominated assets before calling on the swap line with the ECB (ECB 2007a).

The Riksbank used its swap line with the Federal Reserve to borrow USD by providing collateral in SEK (Riksbank 2010). On December 31, 2008, the Riksbank had the ability to borrow an additional USD 5 billion (SEK 39 billion) from the Federal Reserve as part of a swap agreement (Riksbank 2009b). At the end of March 2009, the Riksbank had a total dollar borrowing of SEK 194 billion from the Federal Reserve (Riksbank 2010).

The swap agreement identified no specific time limit and was established as a standing facility (ECB 2007a).