Spreads have already widened on debt issued by commercial real estate firms and some have started reducing debt by selling off parts of their portfolios. Property companies account for around 44% of banks' commercial lending, figures from the Riksbank showed. The FSA reckons banks could see credit losses of up to 45 billion crowns in a sharp downturn, mainly caused by unlisted commercial property firms.
Sweden's retail housing market is also a worry. Prices have fallen about 15% over the past year amid soaring mortgage rates and cost of living pressures. But authorities do not expect another financial crisis like that which hit Sweden in the early 1990s when the central bank policy rate was hiked to 500%. Over the last decade, lending regulations have been tightened and banks' buffers against credit losses are stronger. Authorities have better tools to deal with problems that materialize, including winding up banks that get in trouble, Karolina Ekholm, the head of Sweden's Debt Office, said. Furthermore, the current downturn is expected to be relatively short and mild, meaning unemployment is not expected to surge.
Nevertheless, adjustments in the commercial property sector and tumbling house prices will be a challenge for banks. "Debts don't go away. They need to be paid," Riksbank Governor Erik Thedeen said. "The level of debt is a challenge and I don't think we can exclude a pretty nasty development." ($1 = 10.4149 Swedish crowns) (Reporting by Simon Johnson; Editing by Christina Fincher)
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