Swedish banks’ exposure to economies in the Baltic region has contributed to persistent market doubts, the IMF said in a report that follows its consultation in late July with Swedish authorities. The international financial body noted that “steps to strengthen banks further—including raising private capital where necessary—should be undertaken as soon as possible.”

The IMF estimated that Swedish GDP would shrink by 6 percent in 2009, with a “modest” recovery to be expected in mid-2010.

Sweden’s export composition and the regional role of its banks meant that the country had been hit harder than most by the global downturn.

The IMF said it “welcomed the authorities’ prompt and appropriate policy responses, which have allayed immediate concerns with financial sector stability, and helped cushion domestic demand.”

But the country’s prospects for recovery are largely dependent on overseas developments, it added.

“If global demand for Sweden’s output bundle recovers slowly relative to other components, Sweden could have a late exit out of the current recession,” the IMF said.