REUTERS SUMMIT-Strong demand for Swedish debt set to last -Debt Office

Mon Sep 30, 2013 4:48pm BST

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(For other news from Reuters Nordic Investment Summit, click here)

* Strong demand could be "structural trend" -debt management head

* He says investors not spooked by budget deficits, household debt

By Daniel Dickson and Simon Johnson

STOCKHOLM, Sept 30 (Reuters) - Safe-haven Sweden is set to see strong demand for its debt for some time to come thanks to strong government finances and a gold-plated investment rating, the head of debt management at Sweden's Debt Office said on Monday.

Sweden saw foreign investors pile into its bonds in the wake of the financial crisis and they remain net buyers despite brighter signs in the global economy, Thomas Olofsson told the Reuters Nordic Investment Summit.

"Sweden together with other countries in northern Europe are seen as safe havens," he said.

Foreign investors owned 51.9 percent of outstanding Swedish government bonds at the end of July, up from 35.7 percent at the end of 2008, according to the Debt Office.

Olofsson said that much of the demand for Swedish debt was coming from central banks diversifying their foreign currency holdings, while Sweden's rare AAA-rating gives its debt wide appeal.

"The panic is perhaps gone from the euro into other currencies, but diversification, the need for AAAs, the need for liquidity is still there," he said.

"I think there are at least good arguments for why this could be a more structural trend, and once it is in place I think it will take time to reverse it," Olofsson said.

Demand for Swedish debt will remain despite a worsening in Swedish government finances, he said.

Sweden is expected to need to borrow a net 163 billion crowns ($25.39 billion) this year, according to a Debt Office forecast from July with a further shortfall next year.

But this has not spooked investors, Olofsson said. Despite an election due next year and a government that is increasing spending to stimulate the economy, he said investor confidence remained high the government would be prudent in its plans.

GROWTH

Growth this year in Sweden is expected to be around a meagre 1 percent but to pick up next year.

With state debt at about 32 percent of gross domestic product at the end of 2012 and expected to decline to as low as 25 percent in 2017 according to the Debt Office, its public finances remain among the best in Europe.

"We don't have to be afraid to have deficits because deficits don't trigger any sort of alarm," Olofsson said.

"Structurally, we do have a balanced budget or better, so it is not a problem."

Nor have investors taken alarm at worries about levels of household debt in Sweden that are among the highest in Europe, he said.

A house price crash could trigger a deep economic recession and lead to big losses for Sweden's lenders.

"Investors ask me about the banking system, but it doesn't seem to be any kind of headline question for investors today," Olofsson said.

Sweden's government has introduced a number of measures to ease pressure in the housing market, but has warned that it may need to take further steps - including higher capital requirements to cover bank's mortgage lending - if borrowing rates do not slow.

The Debt Office is still looking at whether to issue a new 30-year bond, but Olofsson said demand for such debt remained uncertain.

However, revised regulations for insurance companies in Sweden were likely to lead to somewhat increased demand for debt in the 10-20 year maturity range, he said.

(For other news from Reuters Nordic Investment Summit, click here) ($1 = 6.4203 Swedish crowns)

Follow Reuters Summits on Twitter @Reuters_Summits (Editing by Pravin Char)

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