Stopping a financial crisis the Swedish way

A banking system in crisis; an economy hemorrhaging jobs; a market-orientated government struggling to stem panic; sound familiar? It does to Sweden, but luckily they survived it, and are offering their advice to Washington, says the New York Times.

The Swedish crisis has strikingly similar origins to the American one, says the Times. Financial deregulation in the 1980s fed a frenzy of real estate lending by Sweden's banks and property prices imploded, with the bubble deflating fast in 1991 and 1992. A vain effort to defend Sweden's currency, the krona, caused overnight interest rates to spike at one point to 500 per cent.

Sweden's solution: take control of the banks guaranteeing all bank deposits and creditors. A new agency was formed to supervise institutions that needed recapitalisation, and another that sold off the assets, mainly real estate, that the banks held as collateral:

  • Sweden spent 4 per cent of its gross domestic product (GDP), or 65 billion kronor, the equivalent of $11.7 billion at the time, or $18.3 billion in today's dollars, to rescue ailing banks.

  • That is slightly less, proportionate to the national economy, than the $700 billion, or roughly 5 per cent of GDP, that the Bush administration estimates its own move will cost in the United States.

  • But the final cost to Sweden ended up being less than 2 per cent of its GDP; some officials say they believe it was closer to zero, depending on how certain rates of return are calculated.

  • This method turned a profit for the country's largest bank in 1993, and when markets stabilised, Sweden reaped the benefits by taking banks public again.

    A few American commentators have proposed that the United States government extract equity from banks as a price for their rescue. But it does not seem to be under serious consideration yet in the Bush administration or Congress. However, maybe it should be, says the Times.

    Source: Carter Dougherty, Stopping a Financial Crisis, the Swedish Way, New York Times, September 23, 2008.

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    FMF Policy bulletin/ 30 September 2008
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