Sweden detailed measures potentially worth more than 1.5 trillion Swedish crowns (€152 billion) today to support its financial firms, the latest country to try to shore up faith in the banking sector.
The government will offer guarantees on new borrowing by financial firms up to a maximum of 1.5 trillion crowns ($205 billion) in total in return for fees from the banks.
The offer to insure investors against the risk of a default on new bank debt will run to April 30th, 2009, but the state has left open the possibility of extending it another eight months.
Sweden will also set aside 15 billion crowns in a financial stabilisation fund which would be used to deal with a solvency crisis at a financial firm if one should arise in future.
"The government is proposing powerful measures to ease the effects on Swedish households and companies of the financial turbulence," Financial Markets Minister Mats Odell said in a statement.
Speaking to reporters, Finance Minister Anders Borg said he expected all of Sweden's banks to join the guarantee scheme. Three of Sweden's four biggest banks declined to comment on whether they would participate. One of the four, market leader Nordea was not immediately available for comment.
Several European countries have taken measures to prop up banks with liquidity problems, guarantee borrowing and get credit markets moving before the current economic slump turns into a full-blown meltdown.
But unlike some of these nations, Sweden is not injecting capital into banks now. Should this be necessary, institutions will have to issue preference shares to the state.
Odell said Swedish banks were in good shape, but were being increasingly affected by international market conditions. The guarantee will only be given to banks with strong capital ratios. Analysts said the measures should help ease strains.
"By offering a guarantee, the government is making funding available for banks again, and that is very important," said Andreas Hakansson, analyst at UBS.
Rickard Strand, analyst at HQ Bank, said borrowing costs for banks were already falling, but that this should ease worries in the minds of lenders.
"There are fewer and fewer reasons for the market to hesitate (to lend) now," he said. Shares in the Nordic banking sector were up 4.75 per cent at 10.27am.
In recent weeks, the central bank and the debt office have tried to ease tight credit markets for banks in Sweden with dollar and Swedish crown loans. But while short-term funding conditions for banks have improved, longer-term borrowing remains tough.
Reuters