Sweden Emerges as ‘Safe Harbor’ From Europe Debt Woes (Update2)

By Niklas Magnusson and Adam Ewing

May 21 (Bloomberg) -- When the Baltic countries’ economies collapsed, investors fled Sweden because of its banks’ investments there. Today, they’re flocking to the Nordic country as a refuge from debt-ridden southern Europe.

Banks in Sweden, including Nordea Bank AB and SEB AB, have less at risk in Greece, Italy, Portugal and Spain than most western European countries, Danske Bank A/S figures show. That lending amounted to 2.6 percent of Sweden’s gross domestic product at the end of 2009, compared with 43 percent for Ireland and 35 percent for France, according to Danske.

The modest exposure of Sweden, which hasn’t adopted the euro, to southern Europe’s debt crisis, coupled with the smallest budget deficit in the European Union has instilled confidence in investors. Matters were different in 2008 and 2009, when the Baltics suffered the steepest recession in the EU, sending Swedish bank stocks and the krona slumping.

“Scandinavia is viewed by many investors as a safer place to put money considering the debt crisis affecting the euro-zone countries,” said Espen Furnes, a fund manager at Storebrand ASA in Oslo, which oversees about $54 billion. “Nordic banks have been a defensive play, given their balance sheets are much cleaner, and they are a lower-risk investment compared to many other rivals. They seem a safe place to invest right now.”

Stock Markets Rise

Swedish banks have about $10 billion at risk in Greece, Italy, Portugal and Spain, according to the Bank for International Settlements in Basel, Switzerland, and Danske Bank. Denmark’s $3 billion exposure represents 1.2 percent of its economic output.

The benchmark stock indexes in Denmark and Sweden are the best performers in the developed world this year, up 12 percent and 0.1 percent, respectively, the only developed markets to gain this year. Finland is ranked fourth. That compares with a slump of 28 percent in Greece and a 22 percent drop in Spain.

Sweden’s Svenska Handelsbanken AB, SEB AB and Swedbank AB, the largest Baltic lender, have outperformed the 11 percent decline in the 52-member Bloomberg Europe Banks and Financial Services Index this year. Danske Bank is the eighth-best performer on the index after advancing 5.5 percent.

In the first quarter, all major Nordic banks reported profit that beat analysts’ estimates. Sweden’s four largest banks, Copenhagen-based Danske Bank and DnB NOR ASA of Oslo reported a combined profit of $1.9 billion after loan losses dropped.

‘Safe Harbors’

Nordea shares advanced 1.4 percent to 62.35 kronor in Stockholm trading, while Swedbank gained 2.4 percent to 70.5 kronor. SEB rose 2.6 percent to 41.19 kronor, and Danske Bank increased 0.3 percent to 121.9 kroner.

Investors are seeking “safe harbors,” said Haakan Frisen, an analyst at SEB AB in Stockholm. Sweden’s public finances make it unlikely there’ll be any “financial mistrust” toward Sweden, he said.

“Investors are looking for secure alternatives outside the euro zone and Sweden and Norway are such countries, with a strong state-financial situation and a good industrial structure that benefit from the global recovery and with a large exposure to the U.S. and Asia,” Frisen said, adding that Nordic banks’ small exposure to southern Europe also benefits the region.

The yield on Sweden’s 10-year note is the lowest in 15 months, at 2.56 percent, data compiled by Bloomberg show. That’s less than the 2.72 percent rate Germany pays to borrow for 10 years. The yield on Greek 10-year government bonds stands at 7.83 percent. The cost of insuring against a default by Norway, Finland and Sweden are the lowest in the EU, credit default swaps show.

Southern Europe

Sweden, Denmark and Finland are benefitting from investor concerns about the fiscal problems in southern Europe and doubts that the EU will solve the Greek debt crisis and prevent it from spreading to countries such as Spain, Portugal and Italy.

Some investors aren’t convinced Sweden will prove a safe haven if the sovereign debt crisis leads to a global stock market rout. Sweden’s OMX stock index has dropped 4.3 percent this week, while the krona lost 2.1 percent against the euro and 2.5 percent against the dollar.

In the first quarter of last year, Swedbank slumped 38 percent while SEB, the second-largest lender in the Baltic countries, plummeted 57 percent. Swedbank reported a net loss of 10.5 billion kronor ($1.3 billion) in 2009 after loan losses and provisions in Estonia, Latvia and Lithuania soared. In the first quarter of 2010, it had net income of 536 million kronor, the first quarterly profit in more than a year.

Small Deficits

Sweden is likely to have the smallest budget deficit in the EU in 2010 and 2011, according to EU forecasts. Sweden, Bulgaria and Estonia are the only EU members forecast this year to meet the euro-region requirement of a budget deficit below 3 percent of GDP, even though none of the three countries use the euro.

“In a backdrop of extreme volatility, the Nordic region is a safe place to put your money,” said Karen Olney, a London- based strategist at UBS AG, adding that it may be time to sell Nordic shares and buy shares of exporters in euro countries. “We are not making a wholesale move out of the Nordic or Scandinavian markets, but we suggest taking profits along the way given there are many to take.”