Swedish gov't gives loan guarantee but demands bonus stop

In a unique agreement announced today, the Swedish coalition government guarantees the banks borrowings to the tune of 1.5 billion Swedish crowns. As a requirement, it is demanding a stop on bonuses but not on dividends."We will not have bonuses that can lead to a lot of risks when we stand behind the guarantees," says Finance Minister Anders Borg.

Several other countries have recently undertaken huge bailout packages for the banking sector. But in order for the taxpayers to guarantee the private banks' transactions certain requirements are necessary. One of the tougher requirements is to abstain from dividends to shareholders. In United Kingdom, the demand on suspended dividend payments runs for five years, in Denmark two years. In Sweden, the discussion is under hard criticism. Last Monday, the coalition government presented a package of measures aimed to calm the finance market. There was no mention of a stop to giving out dividends.

According to Swedish Financial Market Minister Mats Odell, the reason behind the stop to dividends is that banks could run out of money if they make new share issues. " This would mean that we have forget new capital injections to the banks that need one. It would be a signal that the state would take care of the whole capitalization issue," Odell states.

The share market reacted positively to the government's bank package and all the bank shares rose in value last Monday. The banks' dividends have been sizable in the recent years and they have influenced an upswing in share values. Last year Swedbank, Handelsbanken and SEbanken together issued 15 million SEK in dividends. The partly state-owned Nordea bank issued around 12 billion SEK in dividends.

The requirement that stands behind the government guarantee is the stop to bonuses during the guarantee period and a statusquo to salary increases and board members' fees and severance pays. The demand on banks however, stands only during the guarantee period that stretches up to April 30, 2009 which means that it would be no hinder to raise salaries and give bonuses if the guarantee period is not prolonged. According to the government, a prolongation is possible up to December next year. ( Translated from Dagens Nyheter, Oct. 21, 2008)