I quote: “A transfer of production and employment between firms and industries may occur through higher domestic cost pressures” … and further … “How strong the pressures will be depends in particular on how strongly Norwegian business and industry is involved in petroleum activities and the scale of revenues that are used domestically”. The report underlines the responsibility that economic policy would have for developments. Fourteen years later, in 1988, former central bank governor Hermod Skånland summarised the experience gained up to that point in time.1 He was pessimistic. We had spent a large share of the cash flow from the petroleum sector on costly counter-cyclical policies and a rapid expansion of welfare schemes. Internationally exposed industries were scaled back, and it seemed that the economy was unstable. Inflation had taken root. Skånland concluded the lecture as follows: “We will be facing greater challenges with regard to demand management than countries with a broader industry base. It still remains to be seen whether we are more capable of addressing these challenges.”  Experience of other countries The experience of other countries that had received large, unexpected income from natural resources was not encouraging. The classic example is Spain’s substantial revenues from the colonisation of America in the 1600s. The historian David Landes summarised the Spanish experience as follows: Landes stated that easy money is bad for a country. It is very tempting to live comfortably on this income and be less concerned about safeguarding other revenue sources.
One cannot rule out the possibility that investors might reduce their holdings or perhaps no longer wish to own Swedish mortgages through covered bonds when housing prices are falling heavily. Although the risk of direct loan losses on the banks’ mortgages is initially small, investors who perceive the uncertainty to be great and who have poor knowledge of the credit risk might wish to sell their holdings. If a general expectation of increased sales pressure also builds up, a large number of more well-informed investors 4  BIS central bankers’ speeches  might choose to sell their holdings of Swedish covered bonds to avoid large falls in value. This type of herd behaviour could create very negative price fluctuations on the bond market and perhaps even disrupt the functioning of the market. The stress tests carried out by both the Riksbank and other analysts indicate that the Swedish banks would be able to cope with a large fall in housing prices without the earmarked collateral declining significantly. But regardless of this, we can be sure that the uncertainty regarding the covered bonds would increase if housing prices were falling and it is always international confidence in the Swedish housing market that is important here. However, it is difficult to predict at what loan-to-value ratio the Swedish covered bonds would begin to be perceived as less safe by the market. Perceptions of what is acceptable may suddenly change.