1976 - Wave of devaluations starts

In Europe, governments tried to set up new exchange rate agreements with each other. Sweden participated in these attempts but, under the pressure of deteriorated competitiveness, the krona was devalued repeatedly from 1976 on.

The combination of an expansionary monetary policy, a rapidly growing budget deficit and national debt, a deteriorated current account, high inflation and rapidly rising wage costs led Sweden to devalue the krona repeatedly. This was to strengthen the competitiveness of the manufacturing sector and thereby improve the current account so that foreign debt would not grow too large.

In April 1977, the members of the currency snake met at Sweden’s initiative. Sweden referred to the imbalance in its overseas transactions and devalued the krona by 6 per cent against the West German Deutsche Mark. In August, the krona was again devalued, this time by 10 per cent. At the same time, Sweden left the currency snake. The Riksbank decided that, in future, the krona would be pegged to a basket of currencies consisting of the 15 most important trading currencies. Each currency in the basket was given a greater or lesser weight, corresponding to its role in foreign trade. The US dollar, however, had its weight doubled.

In December 1978, the groundwork was laid for the EC countries’ new monetary cooperation, the EMS. This was based on fixed exchange rates against other members and joint rescue purchases of currencies. States outside the EC were also allowed to join, but Sweden opted to remain outside.

The deteriorated current account and growing budget deficit continued to be a headache for the Riksbank and, through the 1970s, it became increasingly clear to the Riksbank’s leaders that it is difficult to rely on regulations when markets are widening and opening. But the political decision-makers were wary of the consequences of deregulation.

Up until the start of the 1980s, Sweden had followed international interest rate developments, albeit after a delay. However, Sweden hesitated for a long time to adopt the fight against inflation as a target for economic policy. Instead of the interest rate, it was the exchange rate that had to solve the problems of Sweden’s stabilisation policy.

Speculation over a devaluation of the krona led to an acute currency crisis in 1981. The Riksbank raised the discount rate to 12 per cent and the penalty rate for banks who had borrowed money from the Riksbank, above a certain level, to 17 per cent, the highest levels yet. At the same time, a loan cap was introduced for banks and financial companies. In September, the Riksbank decided on another devaluation, this time of 10 per cent. After the devaluation, the Riksbank cut the interest rate but kept the commercial banks’ liquidity ratios so that they were forced to purchase government bonds to fund the large budget deficit, which was up to 14 per cent of GDP by the summer of 1982.

After the change of Government in 1982, a ‘superdevaluation’ of 16 per cent was implemented. Unlike previous devaluations from 1946 onwards, in which the Riksbank had played an active role, the Riksbank did not participate in the newly elected Government’s plans, even though the General Council of the Riksbank would take the decision. As the result of the election had not been reflected in the composition of the General Council yet, the departing Governor of the Riksbank, Lars Wohlin, had the deciding vote. Wohlin saw himself as a civil servant in this regard, prepared to do whatever was needed to defend the foreign currency reserve.

However, even after this devaluation, inflation and wages continued to rise faster in Sweden than abroad and prices and wages had eaten up the entire effect of the ‘superdevaluation’ after only three–four years.