Krone price, oil fund Norway's terrifying scenario that scares economists

It may seem like a contradiction, but Norwegian politicians can spend more money because Norway has become one less Attractive.

High wages and bleak prospects for Norway's most important industry are among the reasons used to explain that the Norwegian krone is cheap.

You now have to pay 80 percent more for a dollar than you did before oil prices fell 10 years ago.

When the krone depreciates, offshore oil fund values become much larger as measured in Norwegian krone. Thus Norwegian politicians can spend several billion dollars without breaking business rules.

Read also: The oil fund has NOK 3,122 billion which does not actually exist

The opposite is horror

But what would happen if Norway's gravity rose again?

Chief Economist Jan Ludwig Andreessen at the Ika Group describes it as one of two elements in a kind of horror scenario for the Norwegian economy:

“I think you face the biggest risk to our pension funds this decade, which is that the global economy will experience a contraction led by the failure of the US economy, with stock prices falling and the dollar weakening as a result,” says Andreessen. Netavisin.

We will return to the exact reason behind the appearance of this foam.

Is this combination possible?

Usually you don't have one The economic collapse and the strong krone came at the same time.

When stock markets collapsed at the start of the pandemic, the krona performed poorly — against the dollar, the euro and the Swedish krona.

However, there is something similar: In the months following the collapse of Bear Stearns in March 2008, at the beginning of the financial crisis, the krone was at its strongest levels ever against the dollar. It then became possible to buy dollars for less than 5 Norwegian kroner.

But that didn't last: When the stock markets actually collapsed in the fall of 2008, Strengthen The dollar itself is strong. The euro exchange rate went straight to heaven.

What would happen if the United States stopped paying its bills?

Now the world looks different. The high national debt in particular is a cause for concern.

In the United States there are regular arguments about whether it is necessary to raise the so-called “debt ceiling”. Whether the state is allowed to repay debts that have already been paid.

If the US government is no longer considered a reliable borrower, the consequences will be dire.

note! By the new year, the oil fund had invested NOK 1.344 billion of US government bonds.

This is how it can develop

So how Could we end up in a situation where the market falls and the krone strengthens?

Chief economist Jan Ludwig Andreessen says the hypothetical scenario could be as follows:

Both China and the United States were downgraded by credit analysts last year. It is fully in line with the International Monetary Fund's warnings on the development of public finances. Here, China may be worse off than the United States, but the role that China plays in various financial networks is much smaller than the role that the United States plays.

In practical terms, this means that the consequences of the crisis in the United States would be much greater if it occurred first.

– An increase in the risk premium on the part of investors on all US debt may cause severe harm to the US and global economies. Stocks and bonds would have to be bought back to significantly lower levels, which for many would see income reduced.

Lower incomes will in turn affect the United States more than any other country, because it has more wealth to lose, with the value of the dollar declining as a result. It's an exciting combination for the Norwegian economy and for all our financial investments, he says.

Investors usually flee Norway during times of uncertainty. But Norway is now one of the few countries that considers Norway a country with hTop ranking of all major credit bureaus. It could become important if other countries don't pay their bill.

– It would be especially bad if Norway emerged as a safe haven in the global credit market, with a sharp rise in the krone exchange rate as a result, says Andreasen.

Why this scary combination?

Let's take the crown reinforcement first:

According to Norges Bank, the weak krone accounts for NOK 3,122 billion of the fund's value. A return to the “neutral” level would in itself wipe out that money.
But the krone could get stronger: in 2012, for example, the value of the fund was adjusted to Norwegian krone. under By eight percent because strong Crown. If this happens again, the value of the fund will be reduced from 17,700 to 13,400 billion.

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Once the krone exchange rate adjusted back to the 2012 level, about NOK 4,300 billion went out of the fund.

Admittedly, this does not make Norway poorer, because the actual values in the fund are not affected by the krone exchange rate.

However, it has serious consequences: it means that it can be used by the state On the state budget.

He warned of a 40 percent drop in value

But when a strong krone exchange rate is combined with falling stock prices, it gets really dramatic.

Worst case

Even if these numbers are greatly exaggerated Worst case– Figures, even a decrease of only 1/3 would mean that the country would have to cut about NOK 100 billion in annual expenditures.

Last year, Netavesin was able to say that no party in parliament had any ideas on how to cut $100 billion from the national budget, despite the Finance Ministry warning against using oil money too much.

There is no doubt that strengthening the krone will make importing goods very profitable, but the question then becomes: How will you pay for imports, when spending must be cut?