SWEDEN ASKS ABOUT U.S. EXPECTATIONS FOR THE G-20 SUMMIT;

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TAGS: EFIN ECON SENV PGOV PREL SW
SUBJECT: SWEDEN ASKS ABOUT U.S. EXPECTATIONS FOR THE G-20 SUMMIT;
DISCUSSES ECONOMIC SITUATION IN LATVIA AND SWEDEN


1. (SBU) Summary: As EU President, Sweden has asked what sort of
political success the U.S. is seeking from the G-20 Summit in
Pittsburgh. State Secretary for Finance Per Jansson noted the need
to show concrete progress in handling the financial crisis, and on
climate change. He also discussed economic developments in Latvia,
where he sees mixed progress; and in Sweden where slight signs of
recovery are starting to show. End Summary.

Expectations for the G-20 Summit?
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2. (SBU) In an August 21 meeting with DCM, Finance Ministry State
Secretary Per Jansson noted that everybody wants the Pittsburgh G-20
Summit to be a success, and as the party representing the European
position, Sweden would like to understand the U.S. view of what sort
of political success (e.g. deliverables) we will be looking for from
the Summit. Since it will not be enough to confirm that we will
deliver on the London commitments, he asked, what are the U.S.
thoughts on what Pittsburgh will actually deliver?


3. (SBU) Jansson thought G20 progress on climate has been "very
good" because it is one of the few places where developing and
developed countries can discuss climate change. He said his
government is interested in the U.S. view on what it would take to
call this a success, will having a good discussion be sufficient,
are we looking for deliverables?


4. (SBU) Jansson asked what were U.S. expectations for discussion
at the G20 about IMF restructuring, noting that there were internal
discussions at the IMF. (Comment: Sweden is concerned about the
Nordic seat at the IMF. The U.S. has told Swedish officials that
consolidation of the IMF Board needs to happen, but how Europe
consolidates is a matter for Europe to sort out. End Comment.)

Latvia
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5. (SBU) On the Baltics, Jansson thought things were better than a
month ago when we had a "really bad situation" because the gap
between the EU and IMF positions sent bad signals. He noted that
the joint team visiting Riga concluded that the Latvian government
had done a lot on spending, and little on income, leaving a 15% gap,
which doesn't work. He said the Latvian government would do a
little on taxes, with some concrete revenue enhancers in the spring
of 2010, but it would not amount to much. He thought it good that
the government set the contours of the 2010 budget, and noted that
if the spending reforms fail, the government would consider VAT and
income tax reform. Jansson said the Latvia package would go to the
Board on August 27. He thought the Board was already OK with it,
but the IMF staff had problems.


6. (SBU) Jansson stressed that the underlying problems in Latvia
remained, although the current account was now in a surplus. The
country needed adjustment now, so the crisis does not happen again.
He described the currency as weak but fragile, and that defense of
it had cost 6% of GDP. He noted that the debate over whether the
government would/should devalue had pushed the currency lower as
people safeguarded themselves against devaluation.


7. (SBU) Jansson described the danger of contagion if the situation
in Latvia gets worse, noting that Lithuania would not be able to
keep its exchange rate, and wondering how robust Estonia would be.
He wondered what would happen to the other 8 floating exchange rate
countries in the region, e.g. Poland and Bulgaria. Problems there
would create pressure on the eurozone, and feedback to Sweden and
other Western countries.

It's Good to Be Out of the Eurozone
--------------


8. (SBU) This led Jansson to convey his perspective on the value to
Sweden of being out of the eurozone at the present time. He noted
that Finland's GDP had fallen 11% in the second quarter, while
Sweden with a similar export mix had its GDP fall only 5%
(currently). He concluded that the 6% extra drop was in the
exchange rate. He noted that many in Sweden are talking about
moving to the euro in the midst of the economic crisis for
stability, but it is stability at a low level.


9. (SBU) Jansson said that Sweden and the IMF had worked up the plan
for the IMF to publicly say that the Swedish krona was undervalued.
He said that in the long-run the Swedish government does not want
the currency undervalued, and is not doing anything active in the
market to affect the exchange rate. He expected some nominal
depreciation of the exchange rate as it returns to equilibrium.

Planning for the Unlikely Worst-Case Scenario
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10. (SBU) Jansson reviewed Sweden's contingency planning for a worst
case scenario, describing the legislation in place that allows the
government to nationalize banks. He said the government would take
over banks and separate good and bad assets afterwards rather than
buying impaired assets first because "valuation is hopeless." The
toughness of the restructuring conditions imposed on a bank would
depend on the level of government intervention required. If a bank
were able to raise 70percent private capital, the government would
help with very loose conditions. If the bank was able to remain
private, but needed more government capital, it would face tough
conditions. The third tier would be banks actually taken over by
the government. He stressed that Sweden never plans to have to use
these tools, but the threat of government take over motivates banks
to avoid problems. He cited the example of the recent rights
offering by Swedbank where a relatively small amount of government
support garnered criticism for the banks leadership.


11. (SBU) Jansson illustrated the seriousness of the current
economic decline in Sweden, noting that GDP has currently declined
5% for 2009, but during Sweden's banking crisis of the early 1990's
the greatest annual drop in GDP was only 2%. He said unemployment
had been projected to peak in 2011, but was now expected to peak in
2010 since recent economic indicators were more encouraging. Still,
he expected unemployment to be 11.5% by 2011.

Comment
--------------


12. (SBU) The Ambassador will follow up with Finance Minister Borg
regarding G-20 expectations when the two meet on August 26.

BARZUN