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How non euro countries such as Sweden could suffer from a lowered credit ratings in the euro area countries

Saturday, 26 November 2011
Europe debt crisis has brought some supposedly better performing countries into gradual growing pain. This means that the rating downgrades will affect households in the countries affected with mostly cuts in welfare.

But there will be spilled over effect to other countries such as Sweden whose households are expected to be affected over time, according to analysts such as Erika Pahne, a private Finances analyst with Swedish bank, Swedbank.

When a country’s credit ratings are cut, perhaps it is nothing dramatic from the face of things but over time it can lead to a chain of events that affect the citizens not only in the directly affected country but also countries around them such as Sweden which heavily rely on external trade for survival given its smaller market. The chain reaction may look as follows:

Should France would have a lowered credit ratings, it is a signal that the country is not quite as safe to lend money to which as it has been so far. The risk will be that that the country cannot pay back money it borrows and it’s considered to have increased lack of trust in the market.

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The interest rate on its government bonds will rise which will mean that those that lend to have to be paid more for taking greater risk.

When it becomes more expensive for the state to borrow money, it will increase state debt. It will have to raise taxes or cut back their spending, which affects the welfare and perhaps lowering wages and pensions.

This reduces demand in the country, and it will lead to low growth. Low growths in the euro countries also affect Sweden, as Swedish exports decreases. It also lowers the growth here. And we will lower demand, and get a lower inflation than otherwise, which may lead to a lowering of the policy rate. But it can also become a more precarious in the labour market, explains Erika Pahne.

It can also lead to more pressure on the financial markets, in that risk increases for those banks that lent money to countries with lower ratings, which pushes up market interest rates. So paradoxically, the interest rate on the mortgage in such a position will go up even if the central bank cuts its rate to sustain the economy.
It will look like a country outside the euro zone, such as Sweden, will not suffer from poor credit rating of other countries. No! Sweden will also suffer.

One would imagine that this does not concern us in Sweden, because we have good government finances and households have relatively good economy. It is not, but it is great that we are outside the eurozone, but indirectly it will affect us more or less as there will be a ripple effect. “It is such an important market for us,” says Erika Pahne.
By Scancomark.se Team


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