Barbro Wickman-Parak: The financial crisis – where do we stand today and where are we heading? Speech by Ms Barbro Wickman-Parak, Deputy Governor of the Sveriges Riksbank, at Danske Market's Central Bank Seminar, Snekkersten, Denmark, 11 June 2009. *  *  *  When I joined the Executive Board of the Riksbank almost exactly two years ago, in May 2007, I expected my new job to be varied and exciting. Though I perhaps wasn’t expecting it to be exciting in the way it turned out to be. Of course we were then already aware of the problems with subprime loans in the United States. But, like most other people in Sweden and abroad, I didn’t foresee that the worrying signs we saw then would gradually develop into a global financial crisis of historical proportions. Nor did I anticipate that as a result of this crisis the Riksbank would lend several hundred billion kronor to the banks. Or that the Riksbank would cut the repo rate by 4.25 percentage points during the course of just over six months, to its lowest level ever – the fastest monetary policy easing in the period we have had an inflation target. And of course I could not anticipate that several other central banks would by then have reached the lower limit for their policy rates and have begun to resort to unconventional measures. But nevertheless – this is where we stand now.
Greater focus on credit risks Now that liquidity risks are less prominent, there is instead a greater focus on credit risks, as economic activity has weakened and growth prospects have deteriorated. The very large policy rate cuts made by central banks around the world and the fiscal policy stimulation from governments have not been able to prevent a severe weakening in economic activity. Our most recent forecast published in April points to GDP in the world falling by a good 1 per cent in 2009. This is a something quite unique: since 1970 GDP in the world has increased by on average 3.6 per cent a year and growth has not been negative even for a single year. The export-dependent Swedish economy is hard hit by the international downturn. In our April Monetary Policy Update we forecast a fall in GDP of more than 4 per cent in 2009. When economic activity weakens and the demand for goods and services declines it becomes more difficult for the banks’ borrowers to meet their payments. Bankruptcies  2  BIS Review 73/2009  increase and the banks suffer loan losses. The loan losses in their turn make the banks even less willing to lend money and the economy risks ending up in a spiral where falling activity and stricter credit terms reinforce one another. The banks can cope with loan losses The main scenario in the Riksbank’s forecasts does not involve Sweden ending up in a serious downward spiral.