In the early 1990s, Sweden faced a banking crisis not unlike the one we currently face. Their problem as ours was a deflationary asset spiral in the real estate sector that then left banks holding assets on the balance sheet that were over-inflated in value. Here are a few articles looking at the Swedish Banking Crisis and how Swedish policy makers tackled the problem. One key difference is that the Swedish crisis was just a Swedish crisis (and there was a smaller concurrent banking crisis in Norway), not a global crisis . And no doubt, the sum of our rescue will be a far larger amount but the Swedish banking rescue amounted to a sum equal 12% of Swedish GDP in 1990.
The Swedish Banking Crisis — A Model for Future Response?
From Credit Write Downs.
Step by step the Swedish economy became increasingly vulnerable to shocks. During 1990 matters came to a head. Competitiveness had been eroded by the relatively high inflation in the late 1980s, resulting in an overvalued currency. This caused exports to weaken and meant that the fixed exchange rate policy began to be questioned, leading to periods with relatively high nominal interest rates. Moreover, the tax system was reformed in order to reduce its harmful economic effects but this also contributed to higher post-tax interest rates. Asset prices began to fall and economic activity turned downwards. Between the summers of 1990 and 1993 GDP dropped by a total of 6 per cent. Aggregate unemployment shot up from 3 to 12 per cent of the labour force and the public sector deficit worsened to as much as 12 per cent of GDP. A tidal wave of bankruptcies was a heavy blow to the banking sector, which in this period had to make provisions for loan losses totalling the equivalent of 12 per cent of annual GDP.
Sweden’s Bank Crisis May Provide Guidance for U.S.
By Tom Walsh in the Detroit Free Press.
Sweden’s bank rescue in the early 1990s, like the current crisis in the United States, was triggered by the bursting of a real estate bubble and a wave of bankruptcies.
The Swedish government took control of its wobbly banks in return for emergency aid, meaning that taxpayers were on the hook for the bailout bill. The citizens also became the banks’ owners who stood to profit — and did — years later when the industry recovered.
US Learns Lessons from Swedish Banking Crisis
From The Local.
Several years of hysterical property and commodity speculation in the 1980s plunged Sweden into its worst financial crisis since the 1930s.
“There are significant similarities between the current American financial crisis and our own financial crisis at the beginning of the 1990s. It concerns a finance and property bubble that has lead to large losses in the the banking sector.”
Lundgren argues, like the US president George Bush, that governments have a major part to play in such exceptional situations, adding that there is a good chance of reclaiming the money.
The Swedish Experience
From Sverige Riksbank.
The economic problems in Sweden in the early 1990s should be seen in their historical context. For several reasons, economic growth in Sweden has been relatively weak ever since about 1970. Following the collapse of the Bretton Woods system the creation of a stable macroeconomic environment turned out to be difficult. Wage formation functioned badly, fiscal policy was unduly weak and this was gradually compounded by structural problems.
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. 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.
