Transcript Slide 1

The experiences , questions & lessons taken from Sweden.
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

The Swedish Economic Background (1970s1980’s)
Role of Deregulation (1985)
 Credit expansion & the housing bubble

The Crisis (1989 – 1992)
 Extent of the crisis

Crisis Management
 Lessons and policy implications from the crisis
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Conclusion
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
What caused this crisis? Deregulation? Fixed
exchange rate? Bad policies?

How was the Swedish Crisis resolved so
quickly? Good policy or global economic
growth?

What are the policies we can adopt and the
lessons we can take from this crisis today?
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Sweden, 1970’s to 1980’s
1.
2.
3.
• Restricted capital flows
• Growth dependant on exports
• Fixed exchange rate
• Highly regulated financial markets
• Strong labour market rigidities
• Government enforced full employment policy
• Nominal tax system with full deductibility of interest payments
• High inflation
• Multiple devaluations
• High interest rates
• Large government deficit (1982 : 7% of GDP) & low private savings
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Source: Englund, Peter (1999), "The Swedish Banking Crisis: Roots and Consequences", Oxford Review vol 15 n°3, Swedish Statisitics pp 826
percent
Household saving rates, 1980-1995 (percent of disposable
income)
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8
6
4
2
0
-2
-4
-6
-8
Norway
Sweden
Finland
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95
year
Source: Steigum, E (2008). “Monetary instability, financial deregulation and crisis: Some Nordic lessons.” Norweign School of Management.
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1980’s
 High regulation of banks and insurance companies.
▪ Lending ceilings & placement requirements.

1983-1985
 Theses regulations were progressively lifted.
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1989
 Regulation on international transactions were finally
lifted.
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1. Financial sector weaknesses
Lack of expertise
 Difficulty adapting to the change from a sheltered environment to a much more
open & competitive situation.
Increased risk-taking
 High leveraging
 High-risk concentration in certain economic sectors
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Primarily real estate (60% of all loan losses)
Presumed no exchange rate risk
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Banks as borrowers themselves insisted on loans denominated in foreign currency
Believed not to have hedged against this risk.
Government no longer borrowing in foreign currency
 Borrow from banks that borrow abroad
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Government transferred the exchange rate risk to domestic banks.
2. Fixed exchange rate with free capital movements
Capital inflows
 Upward pressures on the exchange rate
 Contributed to the overheating of the economy.
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Source: Englund, Peter (1999), "The Swedish Banking Crisis: Roots and Consequences", Oxford Review vol 15 n°3, Wallendar(1994) pp 84
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Real estate real price bubbles in Oslo (1981=100) and
Stockholm (1983=100)
300
250
index
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Oslo
150
Stockholm
100
50
0
0
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9 10 11 12 13 14 15
ye ar
Source: Steigum, E (2008). “Monetary instability, financial deregulation and crisis: Some Nordic lessons.” Norweign School of Management.
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Source: Englund, Peter (1999), "The Swedish Banking Crisis: Roots and Consequences", Oxford Review vol 15 n°3, Wallendar(1994) pp 87
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1989… triggers the crisis!
1. Internal factors.
 Bad timing on new saving policies
 Tax reform on interest payments
 Inflation focused macroeconomic policy
2. External factors .
 German unification
 Global Economic slowdown
 ERM break down- float of the krona
3. Commercial property reached it’s peak.
 Instant reaction by the stock market
 52% fall in the real estate index
 Foreign credit lines withdrawn
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1990 bubble burst and the residential real
estate prices dropped 25 % .
From the late 1980’s to 1992 non performing
bank loans mushroomed from 0.2% to 5%.
From 1991 to 1993 Sweden’s GDP fell by a
total of around 6%.
Unemployment shot up from 3% to 12%.
Public sector deficit worsened to as much as
12% of GDP.
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Source: Englund, Peter (1999), "The Swedish Banking Crisis: Roots and Consequences", Oxford Review vol 15 n°3, Wallendar(1994) pp 87
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Source: Englund, Peter (1999), "The Swedish Banking Crisis: Roots and Consequences", Oxford Review vol 15 n°3, Wallendar(1994) pp 90
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Financial Measures
Restore confidence
1.
a.
The banking liquidation or reconstruction strategy was
explained to the public.
2.
a.
b.
c.
A new agency, Bank Support Authority
Losses were announced
Method establish to decide exactly which banks need to be
liquidated.
Strict Valuation Rules
3.
a.
4.
Government issued an unlimited guarantee to all depositors.
Banks were marked-to-market
Bleed the Shareholders & bankers
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Financial Measures (cont.): AMCs
How do they work?
Splitting the ailing bank into a ‘good bank’ and ‘bad
bank’
 ‘bad’ assets go to the AMC at carefully assessed
market values
 Regrouping and improvement of assets
 Wait for a reasonable price
 Time consuming but better than a fire sale
 Allowed bank to get back to more important
strategies
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AMC’s (cont.):
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High degree of independence from political and regulatory constraints.
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They were deliberately over capitalised (SEK 24 billion, an amount equal to the
Swedish defence budget)
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Enabled the AMCs to carry out their salvage operations autonomously and did
not have to request funding from legislature which might have tried to
influence their decisions
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Exempt from regulation on the timing of collateral liquidation (estimated it
would take a decade)
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Fiscal Policy
 Not much it could do as it was already extremely
deficitary.
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Monetary Policy
 Dual role:
▪ Stimulating the economy and ease burden on
borrowers.
▪ Ensure capital flows need to rebuild depleted foreign
currency reserves.
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Growth of the Swedish economy paralleled the
global economic boom of the 1990s.
▪ Foreign demand for Swedish goods and services rose from
0.89 % of GDP in 1990 to 1.2% of GDP in 1995.
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Liquidations were completed by 1997 at a
smaller cost than tax payers had anticipated
▪ AMC return 1.8 billion dollars in 1997 of its 4.5 billion (in
depreciated kronas)
“Did sensible policies pay off or did the rising tide lift
all boats?” (Ergungor, 2007)
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No proof to answer this question directly.
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Can only evaluate the resolution strategy
from previous crises (Ergungor et al, 2006)
 confidence needs to be restored quickly
 The process must be transparent
 Maintenance of market discipline
 A plan to jump start credit flows in the financial
system by repairing the damaged
 political consensus and independence
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
What caused this crisis? Deregulation? Fixed
exchange rate? Bad policies?

How was the Swedish Crisis resolved so quickly?
Good policy or global economic growth?

What are the policies we can adopt and the lessons
we can take from this crisis today?
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Articles:
 Calomiris, Klingebiel,& Laeven. (2004) Taxonomy of the financial crisis
resolution mechanisms cross country experience. World Bank policy research
papers.
 Ergungor E. (2007) On the Resolution of the Financial Crises: The Swedish
Experience. Policy Discussion Papers. Federal Reserve Bank of Cleveland.
 Englund, Peter (1999), "The Swedish Banking Crisis: Roots and
Consequences", Oxford Review on Economic Policy vol 15 n°3, pp 80-97
 Heikensten, Lars (1998), Financial Crisis, experiences from Sweden,
mimeo
 Jackson J. (2008) The US Financial Crisis: lessons from Sweden.
Congressional Research Service Library of Congress. CRS report for
Congress.
 Steigum, E (2008). “Monetary instability, financial deregulation and crisis:
Some Nordic lessons.” Norweign School of Management
 The New York Times. ”How Sweden Solved it’s Banking Crisis” September,
2008.
Data:
 Swedish central bank: http://www.riksbank.com/
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