(Bloomberg) -- The governor of the Riksbank said he has grown more confident that Sweden will avert a real estate-led financial crisis even as some landlords leveraged to the hilt are failing to refinance maturing debt.

“I think we have a slightly more positive view of where we’re heading, but we are very alert,” Erik Thedeen said in an interview at his office in central Stockholm on Thursday. “I’m a little bit less concerned of the tail scenario, a really bad scenario, but I’m still concerned that we have a highly indebted commercial real estate market. That is still an overall risk for the Swedish economy.”

The onslaught of rate hikes since April 2022 to the current 4% has pushed a number of property companies to the brink, turning Sweden into a poster-child of how higher borrowing costs are crimping construction activity and upending the business models of the most debt-laden landlords.

Read More: Riksbank Hikes Swedish Rate With Door Kept Open to Act Again

Thedeen, who joined the the central bank from Sweden’s financial regulator at the beginning of the year, said a more granular approach is needed when looking at the sector’s roughly $17 billion of maturing bond debt this year and next.

“There’s a big difference between the really weak companies — you know which they are by just looking in Swedish newspapers — the stronger names, and those that are in between.”

Although troubled real estate firms, such as Samhallsbyggnadsbolaget i Norden AB, are not out of the woods, the development in the past six months shows that some have an ability to strengthen balance sheets and refinance maturing debt.

Read More: Sweden’s Embattled Landlords Get Ray of Hope With Bond Sales

“The muddling-through scenario is a fairly likely one,” Thedeen said. While that would mean avoiding a full-blown crisis, it is still “not good for the Swedish economy” and “not good for some of these companies,” he added.

The Riksbank on Thursday joined Swedbank AB and Nordea Bank Abp in forecasting two years of contraction for the biggest Nordic economy. Consumers have pared back spending, Sweden’s export markets are softening and builders are holding back on starting new projects.

A high share of loans that have interest rates fixed on short terms has made Sweden particularly vulnerable to rising borrowing costs. Thedeen said that while the current situation in Sweden’s commercial property market isn’t easily translatable due to local variations, other countries are facing similar economic effects as the Nordic country is now experiencing.

“It’s a canary in the coal mine in the sense that we get effects on housing construction, which is dropping sharply, and on retail sales, especially for capital goods, which are also dropping,” the governor said. “One way or the other, the same will happen in countries with more fixed-rate mortgages, if rates don’t come down before that.”

Read More: Sweden Housing Starts Nosedive in Sign of Worse Shortage to Come

The Riksbank and other authorities are urging real estate companies to shore up balance sheets to avoid ending up in situations similar to those facing SBB and smaller, lower-rated borrowers.

“The longer they wait, the more fragile it gets,” Thedeen said. “If an accident happens down the road, if risk premiums goes up, or something happens with inflation or their underlying business... Of course, the longer they wait, the more the risk increases that they actually end up in problems.”

The turbulence has also led to speculation that the central bank may be constrained when setting rates as bringing borrowing costs too high could topple the market and have contagion effects on the banking system. 

Thedeen called that a “strange argument,” and said keeping rates lower than what is necessary to fight inflation wouldn’t be helpful for the property market as the bulk of borrowing costs for landlords in distress are determined by risk premia rather than the benchmark rate. 

“The best thing that could happen for the commercial real estate market is that we reach our inflation target, because that will pave the way for a better economic development,” he said. “We will stick to the inflation target, period.”  

--With assistance from Charles Daly.

(Adds comments from Thedeen from ninth paragraph.)

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