Sweden wants enforced amortisation

[STOCKHOLM] Sweden needs to introduce rules that will force borrowers to pay down their mortgages to deal with risks from high levels of household debt, central bank Governor Stefan Ingves said on Wednesday.

The central bank cut interest rates to a record low of zero at the end of October and pushed out in time its forecast for when it would start to tighten policy to ward off the risk of deflation. At the same time, it warned that measures to deal with household debts were urgent.

Writing in daily Dagens Nyheter, Riksbank Governor Stefan Ingves said Sweden needed to both stimulate demand and dampen growth in household debts, meaning monetary policy would not be able to work in isolation. "Further measures are necessary to deal with this situation, but a good step along the path would be to introduce compulsory amortisation," Ingves said.

Four in 10 mortgage borrowers in Sweden are not paying off their debt and those who are repaying the principal do so at a rate which would on average take nearly a century.

Mr Ingves said that authorities should tread carefully to avoid a sharp fall in house prices, which could then hurt consumption and the wider economy. But he said it was time to put a brake on debt growth. "The measures that are going to be needed will perhaps not always be popular, but they won't be easier to take in the future, especially when rates start to rise," he said.

Sweden's Financial Stability Council - consisting of the Finance Department, the central bank, the FSA and the Debt Office - will meet later this month to discuss what measures are necessary to deal with household debt.

The central bank has faced a tricky dilemma in the last couple of years with inflation persistently low but high levels of household debt prompting warnings about long-term economic stability.

House prices have soared, as have debt levels, which, in relation to disposable income, reached just over 170 per cent at the end of 2013. The IMF said recently homes were around 20 per cent over-valued.

Worries about household debt had led the central bank to keep monetary policy relatively tight, in turn leading to widespread criticism that it had been ignoring the risk of deflation.

Mr Ingves defended the Riksbank's record, pointing to strong economic growth and consumption, a firm labour market and a well-functioning credit market in Sweden. "It is hard to believe that such a situation would have developed had it not been for a reasonably well-balanced monetary policy," Mr Ingves said.

REUTERS