The Swedish Government proposes plan to secure the stability of the financial system.

"The Government is proposing powerful measures to mitigate the negative effect of the financial crisis on Swedish households and businesses. The Swedish banking industry is well equipped but is being increasingly affected by the global financial turmoil. The Government is therefore asking for a broad mandate in order to be able to take any measures needed to restore confidence to the markets," said Mats Odell, Minister for Local Government and Financial Markets.

"While we are taking actions to maintain stability and restore confidence to the markets, the basic guiding principle is that Swedish taxpayers will not have to bear the costs of any future measures. Clear restrictions with regard to executive compensation and bonuses will be implemented in conjunction with the measures, which give economic advantages to some institutions," said Anders Borg, the Minister of Finance.

The stabilisation plan gives the Government a mandate to manage problems associated with insufficient liquidity and potential future solvency problems while protecting the interests of taxpayers and maintaining predictability. The proposals conform with the conclusions of the European Council.

The stabilisation programme contains the following measures:

* A guarantee scheme. The Government will institute a guarantee scheme of up to SEK 1500 billion to support banks´ and mortgage institutions´ medium-term financing needs. Institutions will have the option to enter into an agreement with the State which, in turn, will guarantee the institutions new issues of debt instruments in exchange for a fee. The Scheme is intended to ease the financing constraints faced by banks as well as lower their borrowing costs.

* Stabilisation fund. A stabilisation fund will be set up to manage potential solvency problems in any Swedish institutions. The Government will contribute SEK 15 billion to this fund. The intention is that the stabilisation fund, along with the deposit guarantee fund, which has approximately SEK 18 billion in capital, will form 2.5% of GDP on average within the next 15 years. A specific stabilisation fee will be charged to all credit institutions. The fee will be risk-differentiated and will be adjusted based on the level of incoming guarantee fees. The fees will begin to be charged once market conditions stabilise.

* Capital injections. Credit institutions which require capital from the State in the future will, for the most part, be required to issue preference shares with high voting rights to the Government. Other forms of investment by the State could be considered. Such aid from the State will only be provided if the State deems that the institution in question, given the prevailing situation at the time, is important for the financial system as a whole.

* Compulsory share redemption. The State will be given the right, in certain circumstances, to buy out other shareholders in systemically important institutions at market price.

* Other conditions. Credit institutions receiving support, both through guarantees and the recapitalisation fund, are to enter into agreements with the State concerning limits on the compensation of key executives.

* A key role to be played by the Swedish National Debt Office. The National Debt Office will be responsible for administering the guarantee scheme, the recapitalisation fund and potential capital injections to credit institutions. The National Debt Office is already responsible for administering the deposit guarantee scheme.

* Follow-up of the measures. The Swedish Financial Supervisory Authority has been asked to monitor the situation in order to check that the benefits arising from these measures are also passed on to households and businesses.

The Government will take a formal decision today to submit the proposal to the Council on Legislation. The proposed legislative bill will be effective immediately after a review by the Council on Legislation and approval by the Riksdag. The Government expects the proposals to come into effect during next week.

Information concerning the Government Medium-Term Credit Guarantee Scheme

Background

The Riksbank and the Swedish National Debt Office have been carrying out measures to provide short-term liquidity to the markets. Banks and mortgage institutions are, however, finding it difficult to obtain financing on longer terms. The purpose of the guarantee scheme for medium-term financing is to mitigate the financing constraints facing these institutions. This in turn should result in better prospects for credit provision to households and businesses.

Outline of the Guarantee Scheme

Institutions will have the option to enter into an agreement with the State which in turn would guarantee the institutions´ new issues of debt instruments in exchange for a fee. The guarantee is limited to the refinancing of the relevant institutions´ existing debt instruments with original maturities longer than 90 days. The scheme is to be administered by the Swedish National Debt Office.

Instruments guaranteed under this scheme may be issued until 30 April 2009. This period could be extended by the Government up to 31 December 2009. The State will initially guarantee up to SEK 1500 billion of debt instruments.

The guarantee will be available to banks and mortgage institutions based and operating in Sweden. Swedish banking groups have substantially centralised their financing activities to the parent company. This means that the guarantee will also have positive effects on the liquidity of subsidiaries of Swedish banks abroad, for example subsidiaries in the Baltic countries could also expect liquidity constraints to be eased. Only institutions with at least 6% Tier 1 capital and at least 9% combined tier 1 and tier 2 capital will qualify for the scheme.

The guarantee fee will be differentiated by risk based on the institutions´ public rating. Institutions lacking a public rating will pay a standardised fee. The fee will be set at a level between the current market price and an estimated price under normal market conditions. This should initially induce financial institutions to utilise the guarantee while at the same time providing incentives to refrain from such use when market prices normalise. The Swedish National Debt Office is to release details on the pricing structure before the scheme comes into effect.

Instruments covered by the guarantee are bonds, certificates of deposits and other non-subordinated debt instruments which have a maturity longer than 90 days but less than five years. The scheme includes covered bonds. It excludes complex and structured financial products. The scheme is not subject to any currency restrictions.

The Riksbank intends to treat the guaranteed debt instruments as government bonds in its lending facilities. The guarantee is to be structured in a way which will qualify the guaranteed instruments a zero-risk weighting, using the standardised approach, for capital adequacy purposes.

The State guarantee will impose restrictions with respect to wage increases, bonus payments, increases in board remuneration and bank executives´ severance packages during the guarantee period.

Applications for the guarantee are to be made to the Swedish National Debt Office. However, no decisions concerning an application can be taken until the Riksdag has approved the bill and the Government has taken a formal decision implementing the scheme.

The European Commission has been informed about the proposal. In accordance with the state aid rule contained in the Treaty on European Union, Commission approval of the proposal must be obtained.