STOCKHOLM - For months, Sweden's government has sought to play down a property crisis that has throttled confidence in the Nordic state, repeating a simple message: While some companies are in trouble, the country is not.
Now Heimstaden Bostad, a $30 billion property investor with swathes of homes from Stockholm to Berlin, is grappling with a multibillion dollar funding crunch, which has rebounded on one of its owners - the country's biggest pension fund.
That undoubtedly raises the stakes for Sweden, the European nation hardest hit by a global property rout triggered by the steep rise in interest rates last year that abruptly ended a decade of virtually free money.
Sweden is one of Europe's wealthiest states and the biggest Nordic economy, but it has an Achilles Heel - a property market where banks have lent more than 4 trillion Swedish crowns ($360 billion) to homeowners. Weighed down by these home loans, Swedes are twice as heavily indebted as Germans or Italians.
Earlier this year, the International Monetary Fund flagged Sweden's historically high household borrowing coupled with debt-driven commercial property firms and their dependence on local banks as a financial stability risk.
The property crisis accelerated this month when pension fund Alecta, which owns a 38% stake in Heimstaden Bostad, said Sweden's biggest residential landlord needed cash and it may contribute.
Swedbank estimates the current shortfall for Heimstaden Bostad could be roughly 30 billion crowns ($2.7 billion).
Sweden's financial regulator launched an inquiry into why and how Alecta had invested $4.5 billion in the property giant, in the first place. Its troubled investment accounts for 4% of its funds.
Christian Dreyer, a spokesperson for Heimstaden, said it had made "good progress covering 2024 bond repayments", and was "not reliant on immediate capital injection for meeting our obligations".
But he also signaled that the company was open to other support.
GOVT GETS READY
As the property crisis widens, Sweden's government is readying for action while crossing its fingers that it will not be needed.
Earlier this year, Karolina Ekholm, Director General of Sweden's Debt Office, said the government had a light debt load and could afford to borrow more to intervene, addressing the possibility of giving credit guarantees or subsidised loans.
One person familiar with government thinking said that while the state was willing to help in principle, it was conscious of the potential political backlash of supporting companies which had taken big risks.
Heimstaden's Dreyer said it was examining a "potential recapitalisation from existing shareholders" and was confident it could "mitigate financial risk" in part through bank financing but expressed openness to other forms of support.
"While we're not dependent on external support, we could consider suitable governmental programs if available," Dreyer said.
In public, the government has sought to play down the crisis.
"There are potential problems that we must keep close eyes on," Financial Markets Minister Niklas Wykman told Reuters, shortly before Heimstaden Bostad's problems became public. "We know that rain and snow is coming. But we have shelters."
"The government is ready to act to secure financial stability if there should be any threats or turmoil," he said, cautioning that the problems of individual firms did not mean the wider sector was in trouble.
Sweden is among the first European countries to find itself struggling as interest rates climb because much of its property debt is short-term, making it a harbinger for the wider region, where the rising cost of money has also rocked Germany.
Roughly half of Swedish homeowners have floating-rate mortgages, meaning rate hikes quickly trigger higher bills for them.
Its developers, meanwhile, often relied on shorter-term loans or bonds that have to be replaced with pricier credit.
Heimstaden Bostad and other companies such as struggling SBB grew quickly, in part by selling cheap short-term Eurobonds, which has since become tougher.
"We've seen a crazy housing boom. We're not seeing a bust - yet," said David Perez, a Sweden Democrat lawmaker. "If interest rates continue to rise and it's coupled with unemployment, that's what we are afraid of."
With interest rates still climbing, analysts such as Marcus Gustavsson of Danske Bank, believe the worst is not yet over.
He reckons that Swedish residential property prices have fallen by roughly 10% and that the property market may only be half way through the rout.
"Until recently Swedes were bidding up the price of homes with funny money," said Andreas Cervenka, author of "Greedy Sweden", a book examining inequality driven partly by the housing boom.
"With rising interest rates, that funny money has turned into real money and it is painful." ($1 = 11.1242 Swedish crowns)
(Additional reporting by Simon Johnson and Johan Ahlander in Stockholm, Greta Rosen Fondahn in Gdansk, Chiara Elisei in London; Writing by John O'Donnell; Editing by Hugh Lawson)