Sweden's Debt Office says weak crown makes FX debt plan costly

STOCKHOLM (Reuters) - Sweden’s Debt Office said on Monday the government should revise its plans to cut foreign currency borrowing as the weak crown is making it too expensive to repay existing FX debt.

The government said in 2015 that it planned to gradually reduce exposure to foreign currency risk in its debt by relying more on domestic borrowing.

Since then, the Debt Office has bought around 20 billion Swedish crowns ($2.08 billion) of other currencies each year to service and repay FX debt. But the cost of doing so has risen as the crown has slid to record lows against the euro and the U.S. dollar.

In its report, the Debt Office said it did not consider the reduction in risk achieved by lowering foreign currency exposure to justify the cost and that a review might prompt a decision to hold FX borrowing at the current level or even increase it.

“For reasons of caution, the Debt Office considers that the purchase of foreign currency with the aim of reducing the foreign currency exposure should be stopped for the present,” it said.

The crown slumped after the Swedish central bank pushed interest rates below zero in 2015, hitting a low of -0.50% in early 2016. Rates have since increased by just 25 basis points, although the currency has recovered some ground since the Riksbank said recently that it still expects to hike rates late this year or early next.

But the crown is still trading around its weakest level against the euro EURSEK= in a decade and in around 17 years against the dollar SEK=.

The Debt Office published its proposals for how government debt should be managed earlier than expected, “in order to reduce the risk of improper market influence”. It gave no further explanation.

In its guidelines, it also proposed setting an overall maturity target of 3.5–6 years for government debt, including foreign currency debt which is excluded at the moment.

At present, the debt office sets an average maturity for each class of bonds -- government bonds, foreign currency borrowing, index-linked debt, for example -- and tweaks issuance to ensure that target is met.

It recommended that the proportion of index-linked bonds in the overall debt should not be reduced to allow greater issuance in government bonds.

Reporting by Simon Johnson; Editing by Catherine Evans