Continued recovery in the world economy To summarise the international economic situation one can say that the new information published during the summer largely supports the picture painted by the Riksbank of a continuing recovery in the world economy. But there are some signs of weakness in the United States and Asia, while Europe looks slightly stronger than expected. Large deterioration in public finances in many countries There were concerns at the monetary policy meeting in June over the possible consequences of the public finance problems in several countries. During the spring these problems had led to increased risk premiums in the financial markets and caused difficulties for many banks. In a worst case scenario, this could lead to a much weaker development abroad, which would also affect Sweden. I said at the monetary policy meeting that in this case we must be prepared to reconsider the direction for our monetary policy. Given this, I shall now specifically discuss public finance problems and developments in the financial markets. Deficits in public finances and national debts have increased rapidly in many countries during the economic crisis. (Figure: Public finances in the OECD area). Developments have been dramatic for some countries, and especially so for Greece. The poorer public finances have pushed up government bond rates and are making it difficult or almost impossible to fund the large deficits. Many other countries are also experiencing serious problems.
Broken lines represent the Riksbank’s forecasts. Repo rate and expected repo rate Per cent, all agents 5  5 Repo rate Repo rate expectations 5 year ahead  4  4  3  3  2  2  1  1  0 Jan-07  0 Jul-07  Jan-08  Jul-08  Jan-09  Jul-09  Jan-10  Jul-10  Sources: TNS SIFO Prospera and the Riksbank  M onetary policy expectations Per cent, money market participants 5  5 Repo rate Forward rate 2010-06-23 Forward rate 2010-08-18  4  4  3  3  2  2  1  1  0  0 06  07  08  09  10  11  12  13  Sources: TNS SIFO Prospera, Reuters EcoWin and the Riksbank  16  BIS Review 109/2010  The Riksbank’s outstanding loans SEK billion 400  400 SEK, commercial paper SEK, variable rate SEK, fixed rate  300  300  200  200  100  100  0  0 Jul-08  Jan-09  Jul-09  Jan-10  Jul-10  Source: the Riksbank  BIS Review 109/2010  17