Archive for the ‘Sweden’ Category
Sweden’s credit crunch lessons
Posted on: April 14, 2008
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It is recognised as one of the oldest central banks in the world.
Yet it seems that Sweden’s Riksbank could even teach America’s Federal Reserve a thing or two about recovering from the current debt crisis.
As the IMF becomes the latest body to call on governments for concerted global action to calm troubled markets, policymakers are studying how Sweden managed to rescue four of its biggest banks when its own credit boom turned to bust in the early 1990s.
House prices had slumped, the currency was out of control, and unemployment and bankruptcies were rising rapidly.
Rescue plan
If the Riksbank had failed to act rapidly and chosen not to inject capital into its major banks, the entire financial system of the country may well have collapsed.
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 You do have to act swiftly. You can’t say this is a banks’ problem, because it is also your problem  Lars Heikensten, former governor, Swedish Riksbank
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At a cost of some $11bn (£5.5bn), Sweden guaranteed repayment of depositors and creditors at all of its stricken banks.
But the state aid was skilfully targeted, so none of the cash went to the bank’s shareholders.
Indeed, most of the money was regained by the Swedish government as the national economy recovered.
Moral hazard
Sweden’s affluent economy could have been threatened
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Perhaps without even fully realising it at the time, the Swedes had identified what was to become known as ‘moral hazard’ – the risk that the state might bail out private investors who risked their money on the stock market.
One man with a ringside seat at the time of the Swedish crisis was the Riksbank’s Lars Heikensten, who subsequently served a term as central bank governor.
“One of the questions we had to ask was quite simple. Will this bank be solvent or not?
“If the government was to step in with taxpayers money to deal with solvency problems, it was made clear that the owners would have to give up all their rights. That was important for political reasons – and for moral hazard reasons.”
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