Around the time that the financial crisis was at its worst—just after Lehman Bros. went bankrupt but before the $700 billion financial rescue TARP was put in place—there were calls for Americans to look to Sweden for lessons on how to solve our banking woes.
Less than 20 years before the American crash, the Scandinavian country had reformed a banking structure that was teetering on collapse after an overheated real estate market—fueled by loose credit and financial deregulation—imploded. Our problems in 2008 were certainly bigger than those of Sweden in 1992, but their problems were more systemic. The Swedish economy was for many years a basket case suffering from high inflation, low real wage growth, and unsustainable public debt. Yet, after the government’s bank takeover in 1992, not only did the economy swiftly recover, but the country passed a series of structural reforms that transformed the nation into one of the most durable economies in Europe.
Superficially, at the very least, there was something we could learn from the Swedish model. Looking back at the successes and failures of TARP versus the successes and failures of the Swedish nationalization plan can give us some clues as to why Sweden was able to turn things around so dramatically after its own crisis, while the United States has stagnated through the slowest economic recovery since World War II. The main advantage that seems to have seen Sweden through its banking crisis and the ensuing years is one that was probably impossible for the United States to emulate in the wake of our own financial crisis: bipartisan political cooperation.
In September of 1992, the Swedish krona, which had been pegged strictly to a basket of currencies for years, was under speculative attack from currency traders who were betting that the country would abandon its peg. In a dramatic measure to fight off speculators and prove its determination not to devalue the currency, Sweden’s central bank raised its interest rate to 500 percent. This came after weeks of smaller, but still dramatic hikes. The banking system was already in shock because of a credit crunch from a burst real estate bubble that saw home prices collapse by 25 percent between 1990 and 1995 and commercial real estate prices drop 42 percent in the same period. By 1992, nonperforming loans had increased tenfold from the previous decade to 5 percent of all loans. Loan losses totaled 12 percent of GDP amid a rash of bankruptcies.
In an economic policy paper written for the European Union during the midst of the American banking crisis in 2009, Lars Jonung—the chief economic adviser to Swedish Prime Minister Carl Bildt in 1992—described Sweden’s situation at the start of the 1990s as dire:
Compared to the record of all major crises in Swedish economic history, the crisis of the 1990s was one of the most costly in terms of output, industrial production, and employment forgone. Only the crisis of the 1930s caused a bigger loss in real income than the crisis of the 1990s. Employment was particularly hard hit during the 1990s. The cumulative employment loss is the largest on record—higher than during the Great Depression of the 1930s.
The 500 percent interest rate hike failed to halt the currency attacks, which were exacerbating the already terrible banking situation. At that point, the government had already had to take over two of the country’s largest banks, and there were fears of more banks falling.
How did Sweden turn this situation around? In every account of the Swedish bank bailout there are two major factors that keep cropping up again and again as having been the keys to why the country was able to save its banking system and its economy: swift action and political consensus.
On Sept. 24, 1992, after a series of bank failures and just one week after the shocking 500 percent interest-rate announcement, Bildt’s center-right government declared jointly with the Social Democratic opposition party that it would issue a blanket guarantee to every single bank depositor and creditor in the country.
To try to prevent future moral hazard and prove to the public that this was not a giveaway to financial elites, several conditions were placed on banks seeking loans. “They were not just bailouts,” Stockholm School of Economics professor Peter Englund told me. “There were strings attached.” Bank shareholders were not covered by the blanket guarantee, and in order to receive the government loans, banks would have to open up their entire books. Two of the country’s six major banks, which had already been taken over by the government, were ultimately merged as a single nationalized bank, and Sweden still has a significant equity stake in the resulting financial entity. The banks that were given help had their assets separated into bad banks and good banks, with an independent body set up to quickly analyze how bad the bad banks were and to carefully sell off those bad assets.