SWEDEN,S PLANS FOR THE G-20, CONCERNS ABOUT THE

C O N F I D E N T I A L SECTION 01 OF 02 STOCKHOLM 000570

SIPDIS

TREASURY FOR ERIC MEYER, DAVID WRIGHT
USEU FOR MATHEW HAARSAGER

E.O. 12958: DECL: 08/25/2019
TAGS: ECON EFIN PGOV PREL SENV SW
SUBJECT: SWEDEN,S PLANS FOR THE G-20, CONCERNS ABOUT THE
BALTICS

Classified By: CLASSIFIED BY DCM ROBERT SILVERMAN, REASONS 1.5 (B) AND
(D)


1. (C) Summary: In a meeting with the U.S. Ambassador,
Sweden,s Finance Minister Anders Borg praised the new mind
set of the U.S. Administration that has us participating in
international institutions. He urged the U.S. to keep
countries focused on the political need to prevent an
economic collapse in the Baltics, opining that the Baltics
still faced a 50% chance of collapse by December. Such a
decline would not threaten Sweden, he said, but would have
consequences for the region. At the G20, Sweden hopes for a
strong statement showing political will to finance measures
against climate change. Borg described EU efforts to improve
regulation of the financial system, expressing concern that
the unavoidable result would be separate U.S. and European
capital markets, which could prove problematic and
protectionist. End summary

Welcoming U.S. Willingness to Work as a Partner


2. (C) On August 25, the Ambassador paid his introductory
courtesy call on Finance Minister Anders Borg. Borg began by
describing enthusiasm in Europe and especially among
Sweden,s political elite for the new U.S. mind frame under
the Obama Administration whereby the U.S. had become more
participatory in international institutions. He praised the
&extraordinary8 statements by Secretary Geitner that the
U.S. would be part of in the IMF Financial Sector Assessment
program (FSAP) and related processes. He said U.S.
participation was key to the credibility of all such
programs. The &big shift8 in the U.S. attitude that had us
now being a partner in such efforts, he said, made it a lot
easier to be a friend of the United States. He noted that
even his children were sporting Obama T-shirts around the
house.

U.S. Needs to Keep the Focus on the Baltics


3. (C) In response to the Ambassador,s question on what else
the U.S. could be doing, Borg said it was important for the
U.S. to keep the international focus on the Baltics, acting
like an uncle to tell the world it is not just a simple
matter of economics, but a political matter that some smaller
countries in Eastern Europe are also important, including
these &small, newly established democracies with a large
neighbor who can be aggressive.8 Borg noted that U.S.
Treasury is &very constructive8 and doing a &very, very
good, very constructive job8 in this regard.


4. (C) Borg expressed the hope that we are seeing some kind
of stabilization in Latvia. He said Latvia could be on one
of two paths: The good path of the government pulling
together, delivering on its promises to the European
Commission and the IMF; political support for those
commitments not declining; and global economic recovery. Or,
Latvia could be on the bad path of no political support for
keeping its commitments, no delivery on those commitments, no
global recovery, and a drop in oil prices that would bring
problems for Russia, and be quite problematic for Russian
behavior toward Latvia. He said politically we cannot have
the Baltics becoming failing states, or something that Russia
would dub a failing state to justify picking up cheap
collateral through Russian investment geared to gaining
dominance in these countries.


5. (C) Borg noted that substantial problems remained in all
the Baltic economies. Twenty-five percent current deficits
had gone to balance within six months, but large imbalances
remained, such as the very weak export sector. On the other
hand, he said, all three economies were quite flexible, had
flexible labor laws and the &spirit8 where they believed
they would be strong economically in the future. Although
you can see positive signs, he cautioned, there remains a 50%
probability that it could all break down by year-end.

Spillover Risk from A Baltic Collapse


6. (C) Borg said a Baltic collapse was a major risk for the
region, but not for Sweden. Borg said it was crucial for
Sweden that Latvia was saved from collapse in December 2008
and June 2009, but now Swedish companies were again getting
credit on international markets making the economy less
vulnerable. There would be problems in one or two specific
banks, but one of them was owned by the Wallenberg family
which had its own good cash balance. The problem, Borg said,
is Swedbank, but a problem with one bank is not a banking
crisis. (Comment: Swedbank is one of the four large banking

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groups in Sweden that combined handle 80% of banking activity
in Sweden.)

G-20 Needs to Issue Strong Statement on Climate Change


7. (C) In response to the Ambassador,s question about
Sweden,s goals for the G20 Summit, Borg noted that now that
financial markets were &a bit more normal8 we should do two
things: build on work already done to prevent a repeat
economic crisis; and increase emphasis on financing efforts
to combat climate change. In order to have success at
Cop-15, Borg said, we need a strong G20 statement from U.S.
and European leaders showing strong political will to find a
solution on financing efforts against climate change.

Financial Regulatory Reform Yielding Separate U.S. and
European Systems


8. (C) On financial reform, Borg explained that we no longer
need acute crisis management, but to work on the Bretton
Woods institutions. Noting that Sweden and the U.S. were
co-chairs the Financing Group, he said U.S. Treasury was
actually leading, which was okay because Treasury was pushing
in the right direction toward solutions and increased
efficiency.


9. (C) Borg said we need to strengthen many parts of the
financial regulatory system, &We don,t need more or less
regulation, we need better regulation8. He said the EU was
working on a macrosupervisory Board, cooperation between
Financial Supervisory Authorities, cooperation between
national Central Banks, common European institutions, and new
common decision making given the challenges of cross-border
banking. He cited the need for strong regulation of the
internal business of the banking system, for example bonuses
and renumeration must consider society,s interests as well
as the bank,s interests because taxpayers could be forced to
pay the bill of a failed bank.


10. (C) Borg said the EU does not want to hinder capital
markets, but private equity needs prudent regulation. He said
that hedge funds and private equity funds had not been a
cause of the current crisis, but could be a problem in the
long-run. He cited Long Term Capital Management (LTCM) as
one hedge fund that did almost devastate the financial sector
in the past. Noting the need for prudency in risk-taking,
Borg said it was reasonable that firms should be held
responsible for risk they are exposed to, what kind of
balance sheets they main, their valuation, and similar
matters.


11. (C) Borg said that in a perfect world, there would be
only one set of regulations, and it would be better to have
one institution. But, we live in an imperfect where the U.S.
and Europe will each have one institution, which &could
cause some problems.8 He said he was aware that having one
capital market in Europe and one in the U.S. &could be
protectionist and problematic.8

Sweden to Address Long-Term Problems in the Labor Market


12. (C) The DCM then asked Borg about the government,s
current negotiations over the government budget. Borg said
his government would implement a second round of crisis
measures this coming year. Because public finances had been
better than expected, the deficit would decline to 1.3 or
1.4% by 2011 (after being 3.5% in 2009 and 3.4% in 2010) .
Measures taken include temporary measures to stimulate demand
such as local government support, infrastructure, temporary
education schemes and changes to labor laws. The next round
of the government,s response was dealing with long-term
structural problems in the labor market. Borg explained that
300,000 jobs had been lost in the current crisis and 100,000
of those losses could be permanent. The government, he said,
needed to go more to make work pay and incentivize people to
stay in the labor market rather than the current cycle:
unemployment benefits; job re-training; and then directly
into early retirement. He noted that in his public
statements, he was careful not to commit to specific job
creation benefits from government measures, since you could
not ensure delivery.
BARZUN