How Sweden Saved Itself
When its banks failed, the Scandinavian country made a miraculous turnaround. Could the U.S. imitate it?
A sign hangs from a branch of Swedbank AB in Stockholm, Sweden, in 2010.
Photo by Casper Hedberg/Bloomberg via Getty Images.
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.
The price of the rescue plan was set at 65 billion krona, or $18.3 billion in today’s dollars, which was then 4 percent of the country’s GDP. As of 1996, that total cost was down to 2 percent GDP after loans were recouped and the last of the bad assets had been sold off. Many economists have argued that if you factor in the country’s continued stake in the nationalized bank, now called Nordea, Sweden ultimately broke even.
The amazing thing about the success of this plan is that although it was announced in September of 1992, no legislation was passed until December. The fact that the two political parties had come together so completely was good enough to inspire public confidence in the banking sector.
“This broad political consensus was I believe of vital importance and made the prompt handling of the financial crisis possible,” said Urban Bäckström, Sweden’s Central Bank chairman from 1994 to 2002, during a speech to a Federal Reserve symposium in 1997.
Sweden ultimately did relent and devalue its currency in November 1992, a decision that had the unexpected and happy effect of leading to a two-decade long trade boom with exports doubling as a percentage of GDP from 1992 to 2008. But Stockholm School of Economics’s Englund says that the key to resolving the initial crisis was still the decisive joint-rescue plan. “The remarkable thing here was that you got all important politicians, all important parties in Parliament [to come] together,” Englund said. “That was the single most important thing.”
Contrast this with how we handled our financial crisis in the United States. After Lehman went bankrupt, Treasury Secretary Henry Paulson designed an ad hoc $700 billion bailout package, without much in the way of strings attached, and presented it to Congress in the midst of the country’s worst financial panic in 80 years. Nancy Pelosi, who had agreed with the Bush administration on the terms of the bailout deal just the day before, gave a speech right before the House was supposed to vote on the bill demagoguing the issue and blaming Bush for the economic calamity. House Republicans used Pelosi’s speech as an excuse to vote down their own party’s plan and the single worst trading day in 20 years ensued.
The bill was eventually passed one week later. While the program ultimately succeeded in restoring market confidence, and only cost taxpayers a fraction of its original price tag, the legislation was a disaster from a political standpoint. "The extreme unpopularity of TARP has made it all but impossible to do anything remotely like it again," Princeton economist Alan Blinder wrote about the legacy of the bill. The fact that the financial sector has recovered more quickly and comprehensively than the broader economy after causing the disaster certainly hasn’t enamored the public to TARP.
In Sweden, on the other hand, the rescue package was viewed universally as a success. The political parties came together and did what was necessary to save the system, while at the same time insisting on extracting something out of the banks. The result was that the Social Democratic minority party was able to win back the reins of government in the next election running on the idea that it had done what was in the national interest during Sweden’s darkest hour.
“That was really part of that trademark as a party and I think it was on their part a rational calculation on how the voters would regard them,” Englund said. “In Swedish politics you gain votes by appearing responsible.”
The initial unity and the shared experience of trial by fire had a lasting impact on both of the nation’s leading political parties. The strength of the recovery allowed the Swedish government to put into place long-term structural and policy reforms with principles from both parties. The vast Swedish social state was trimmed through a series of reforms to pension insurance and unemployment benefits, while Sweden’s generous national health-care benefits and strong public education system were left intact. There was tax reform that broadened the tax base and cut rates but also raised taxes on dividends and capital gains. Perhaps most importantly, an unofficial budget rule was established that required that the government stick to a 1 percent average annual budget surplus. Both parties have been able to stick to this rule, despite no official mechanism for enforcing it, because of its widespread political appeal.
“Rules are important, but even more important is actually that all major parties in the Swedish Parliament [are] supporting responsible fiscal policy,” said the current conservative Finance Minister Anders Borg in a speech in Washington, D.C., earlier this year. “We obviously have a lot of political battles, but they are fought inside a framework where we are sticking to stringent budget policies as a starting point. Obviously this could change, but today we have almost an 80-90 percent support for a balanced budget among the voters, particularly Social Democratic voters.”
Because the nation as a whole is so invested in the welfare state, social mobility, and economic equality, the benefits of balanced budgets are easier to see and the risks of drifting into debt again and potentially risking popular benefit programs are politically unpalatable.
“If we run into trouble, it will be those who are most depending on welfare services and are most depending on the public transfer systems that will be hurt the most,” said Borg.
Widespread economic equality has created a system in which everyone has some skin in the game. This gives politicians leeway to work together.
“You cannot have a society where the conflicts that are built in become so strong that you undermine the political ability to deal with problems,” Borg said. “If I compare Sweden with Spain or Italy and Greece, one of the reasons why we have been able to do this is that our income differences are substantially much lower, which also much means that the political tension is on a completely different level. … I would argue that the combination of broadbased and social cohesion is very, very important.”
This was the conservative finance minister giving this speech, mind you. While Sweden has taken a hit with the dual impact of the American financial crisis, followed by the European debt crisis, the country has weathered the storm a lot better than other EU nations—even those that are also not on the euro like Great Britain.
The results of the country’s political reforms, meanwhile, have been astonishing: After lagging behind for years, Sweden’s economy grew at a faster rate than the American economy throughout most of the aughts. It has recovered more strongly from this latest international recession, with 5.5 percent GDP growth in 2010 compared with 2.9 percent growth in the United States. Sweden’s unemployment rate has been consistently around 1 percent below the American rate during the recovery. Meanwhile, government debt as a percentage of GDP has shrunk to 45.5 percent, as compared with the United States where it has ballooned to more than 100 percent.
Still, the severity of the recent debt crisis in Southern Europe is beginning to be felt in Sweden with the unemployment rate ticking up unexpectedly from 7.0 percent to 7.2 percent in August (still, a full percentage point lower than the rate in the United States). The conservative government has now decided to lower interest rates and expand the deficit in the short term with a financial stimulus that includes business tax cuts and infrastructure spending. They are able to do this because of flexibility from years of surpluses. When the conservative party announced the 23 billion kronor ($3.5 billion) stimulus last month, the leader of the opposition Social Democrats had one major objection: He complained that the conservatives had stolen his party’s ideas.
Jeremy Stahl is Slate's social media editor. You can follow him on Twitter.