# What did Sweden do?



## darag (10 Aug 2009)

Here's a very quick summary of my understanding of the Swedish reaction to their banking crisis.  Their handling of their crisis has been widely admired and is seen has having been far superior to that of the Japanese or the Americans during the Savings and Loans crisis.  In fact, it is widely referenced as a model for others.  I want to compare it with the government's approach.  I'm not 100% sure of all the details here as my knowledge is largely based on a single article.

First of all, in the words of the Swedish Minister at the time, Urban Bäckström, the background to their crisis will sound familiar, I think:


> Credit market deregulation in 1985, necessary in itself, meant that the monetary conditions became more expansionary. This coincided, moreover, with rising activity, relatively high inflation expectations, a tax system that favoured borrowing, and remaining exchange controls that restrained investment in foreign assets. In the absence of a more restrictive economic policy to parry all this, the freer credit market led to a rapidly growing stock of debt (Fig.). In the course of only five years the GDP ratio for private sector debt moved up from 85 to 135 per cent. The credit boom coincided with rising share and real estate prices. During the second half of the 1980s real aggregate asset prices increased by a total of over 125 per cent. A speculative bubble had been generated.



In contrast, and I don't mean it too cruelly, while Bäckström had only been on the job a few days before getting the call that a large Swedish bank was about to collapse, he had considerable experience in finance and had a degree in economics.  He is well able to reference the economics papers which influenced their policy decisions.

In any case, on getting the news that the bank was within days of collapsing which could bring down others, the Swedish reaction was similar to our one.  While he had serious reservations, he reasoned that first and foremost liquidity had to be provided to the banks to provide some stability and he did this with a general guarantee of the banking system which was similar the Irish one.

His next step was different.  A clear separation between liquidity and solvency issues was made to the extent that he had separate organisations managing each.  The immediate next step was to go over each bank's loans and have them re-valued according to the market and economic situation at the time.  Again he had reservations as he recognised the effect in a depressed property market but he reasoned the alternative - a long slow drawn out write down - was significantly more risky.  The Irish government has seemingly take the opposite approach.

As a result of the above the Swedish banks were divided into categories, one of which was the nonviable banks.  These were quickly wound up and their loans were liquidated even if at heavy losses.  Even the other banks were forced to take their lending losses on the chin but the guarantee effectively provided them with long term equity but the message was harsh and clear that this credit would not available indefinitely and that ultimately the holes in their balance sheets would have to be filled by high profitability (by increasing  operating efficiency) and eventually raising shareholder equity.

It certainly seems like a more coherent and better planned approach than that of the government.


----------



## onq (11 Aug 2009)

This suggests a Keynesian approach of "trading out of the crisis", but this could only have worked if there was a market to trace in and assuming private equity could be brought in from elsewhere to re-finance the banks.

We are currently facing a world crisis, so equity from outside looks unlikely.

More importantly, instead of hiving off the toxic debts and winding up the associated institution, we, the taxpayers, are now carrying a burden we cannot sustain into the future.

This government, in fear of the banks, in fear of becoming a bank itself for its electorate, has instead chosen to bail out the worst of the speculators are taxpayers expense and at the cost of a viable ecomonic future of this country.

Talk of property markets recovering seem to forget the state of the Japanese markets, in the doldrums for over a decade and having  gone through several periods of deflation leaving them stagnant for years.

The giant elephants in the room are the derivitive portfolios, which dwarf the debts from other sectors, unless they comprise a balaced book. Given the trading conditions in which they arose, this seems like wishful thinking.

And the one question no-one has asked is: "where is all the money going"? Crises don't just happen - there has to be winners and losers in all of this. This time it looks like those who manipulate the markets haven't just taken profits for themselves, but future profits far ahead.

Goldman Sachs for example, are one of the trading desks that speculate on oil and therefore help set the price of it. They profit from their own speculation, the terms of reference which they set.

One thing's for sure, when the merde hits the fan, there will be a war. There always is after a period of depression.

FWIW

ONQ.


----------



## z109 (11 Aug 2009)

A research paper by the St. Louis Fed on the Swedish crisis by O. Emre Ergungor (http://www.clevelandfed.org/research/economists/ergungor/ )

[broken link removed]
covers the lead up to the crisis and the resolution.

As you say darag, the lead-up is eerily similar.

Some of the scary things:
- the tax rate on the average worker increased from 35% to 65%
- the main bad bank, Securum, lost two-thirds of the investment the state put into it in USD terms (the krona was devalued, making the krona loss smaller)


----------



## iarladavo (12 Aug 2009)

You said  " I'm not 100% sure of all the details here as my knowledge is largely based on a single article"

Just wondering what article this was?


----------



## darag (14 Aug 2009)

iarladavo said:


> You said  " I'm not 100% sure of all the details here as my knowledge is largely based on a single article"
> 
> Just wondering what article this was?


This one initially.  But I've since also looked as some of yoganmahew's links.


----------



## nialdel (27 Aug 2009)

What did Sweden do ?
 Are you sure the Swedish guarantee included Bond Holders ? I believed it only covered deposits


----------



## darag (28 Aug 2009)

Indeed, haven looked a little closer, the Swedish guarantee only provided cover for NEW bond issues which makes sense if the goal is to provide access to liquidity.  Why the Irish government provided a blanket guarantee to all existing bond holders is a mystery but has severely limited their ability to manouver.


----------

