Key Swedish interest rate raised to 75%

SWEDEN'S economy, already in the deepest recession for 50 years, received a body blow yesterday when the central bank raised a key interest rate to 75 per cent.

The increase in the marginal lending rate was the second in two days. On Tuesday the rate was raised from 16 to 24 per cent to defend the currency.

The move was sparked by Finland's decision to float the markka and subsequent currency outflows from Sweden. The government and the central bank have laid down a firm line that they would not follow suit.

'The sky is the limit,' a government spokesman said. 'There will be no devaluation. We are going to defend the exchange rate.'

Sweden has become the target of financial markets because it is a peripheral European economy at a time when only the core currencies - especially the German mark - are attractive. The krona is informally linked to the ecu.

Unlike the currencies within the EMS, it lacks the support of other central banks. And, with fears of an EMS realignment rising, the value of this link is lessened.

Bengt Dennis, governor of the central bank, said yesterday that capital was flowing back into the country. The government has also been intervening in defence of the currency and is increasing its reserves by 16bn ecu through a borrowing programme similiar to that undertaken last week by Britain.

The 75 per cent rate will only apply to short-term borrowings by banks. But the quarter of mortgage-holding Swedes paying on variable terms now face rates of more than 20 per cent.

Kent Holm, of Shearson Lehman, said small businesses and consumer confidence were likely to be badly hit in an economy already looking at a contraction of 1 per cent in gross national product.

Economists were worried that such high interest rates could only be sustained for a short period and that Stockholm might still be forced to devalue. 'The central bank has shown its commitment, but people know that it is a matter of time,' said Mr Holm. 'Rates can't stay this high for ever.'

Sweden's economy is in similiar trouble to Britain. Not only is it hit by slow growth or recession in its major trading partners, it is also in the throes of a structural change as it brings itself into line with the European economy.

Yesterday the government announced that unemployment had reached 5.8 per cent, nearly twice the level of last year. Bankruptcies were up 26 per cent in the first half of the year.

Rising interest rates and falling growth have already brought some financial sector companies to their knees. Yesterday the government held talks with the Gota banking group and its principal owner, the insurance group Trygg-Hansa SPP, which has said it cannot fund further losses.

Trygg-Hansa and the insurance group Skandia have also refused requests for further funds for Svenska Kreditforsakrings, a credit insurance company which suspended payments to its creditors on Wednesday.