The uncertainty there is evident, for example, in the banks’ difficulties with borrowing at longer maturities and in investors’ preference for safe government paper over what they perceive as more risky securities such as mortgage bonds. Even the short-term interest rate on the interbank market has risen sharply as a result of mutual distrust between banks, causing them to avoid lending to each other. As a result, the banks’ borrowing costs rise, access to loans decreases, and companies and households pay more for loans. At times, moreover, trading on certain segments of the fixedincome market has ceased completely. When such disruptions occur, the Riksbank has considered that special measures are required to restore the functioning of the markets so that the supply of credit is not jeopardised and the financial markets, and therefore monetary policy, can work more normally. The first sign: a shortage of treasury bills … The very first, very concrete sign of the financial crisis in Sweden was an acute shortage of treasury bills. The high demand for safe investments, especially in the United States, caused interest rates on American treasury bills to fall almost to zero. Even foreign investors then turned to European countries, including Sweden, to get treasury bills that gave a higher yield. The Swedish National Debt Office decided to implement additional issues of treasury bills. The funds from these extra issues are being used for reversed repo transactions with mortgage bonds (purchase of mortgage bonds with agreements to resell them within a specific period of time).
The Riksbank provided the liquidity assistance to Kaupthing because it wanted to prevent the crisis that has afflicted the Icelandic banking system from spreading to the Swedish financial system. Common to both instances of liquidity assistance is that they occur in a situation in which the entire global financial system is characterised by great uncertainty. Against this background the Riksbank has deemed it necessary to provide support to these institutions, which under normal circumstances would not receive it. In the current situation, suspension of payments by these financial institutions would pose a risk of serious disruption to the rest of the financial system and therefore lead to an undermining of confidence in the payments system. It is these assessments, not concerns about individual institutions, that motivated the Riksbank in granting the assistance for which the banks in question applied. With respect to Carnegie, a few days ago its operations were taken over by the Swedish National Debt Office, which granted a loan that replaces the liquidity assistance previously granted by the Riksbank. Financing assistance for companies Another problem begging for a solution is the financing situation of non-financial companies. As the financial crisis escalated, the credit supply to these companies has also become more troublesome, which could have strong repercussions on economic activity. To alleviate these problems, the Riksbank has temporarily offered banks the opportunity to borrow at three months against collateral comprising more commercial papers than usual.