SWEDEN IN CRISIS

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SWEDEN IN CRISIS

• a drama in four acts

brian darsow saloni kantaria thomas haley
cathy hwang
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(No Transcript)
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Swedish Financial Crisis
CLIMATE
CRISIS!
TRIGGERS
LESSONS
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CLIMATE
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The Good Old Days

• Managed Great Depression with ease
• Post-WWII Plan Large, centralized institutions
  to achieve benefits from economies of scale
• Result few large institutions that received
  government support.
• 1980s 7 Swedish banks over 90 of Swedish
  banking

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The Twin Crises Banking and Currency

• MAJOR FACTORS
• Deregulation of Banking Industry in 1985
• Collapse of Bretton Woods international currency
  system in 1971
• Sweden attempts to maintain fixed currency
  exchange regime until 1992

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Deregulation in 1985

• Pre 1985 Banks required to have 25 of assets in
  bonds.
• 1985 Regulations dropped.

Result Financial supervisory authority couldnt
deal with the new market conditions
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Monetary Policy

• 1970s High inflation rates maybe undermined
  economic expansion.
• 1980s Expansionist monetary policy, increased
  money supply
• Lowers inflation rates
• Increases borrowing
• Increases inflation
• (Banking deregulation also leads to increases in
  money supply.)

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Political Factors

• Tax schedules made borrowing attractive.
• Political pressure encouraged banks to hold
  mortgages originating from government housing
  programs

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The Late 1980s

• 1985-1990 Real estate prices more than double
• Banks hold much short-term foreign-denominated
  debt
• Low interest rates and high inflation

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Putting on the Brakes

• 1989 Government noticed things were moving too
  fast.
• Too much shifting in the markets
• Too much foreign money made Sweden more prone to
  outside shocks
• Govt tries to reign in securities trading and
  housing through new taxes on financial
  transactions

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(No Transcript)
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Financial Crisis!
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Interest Rates Increase

1. German reunification ? Bundesbank raised German
   interest rates ? European interest rates rise.
2. Domestic macroeconomic policies (inflation)
3. Tax reform in 1991 (savings)

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Reduced Demand For Real Estate
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Real Estate Data

• 1988-1990 Investment in real estate - average
  88 above 1983-1985
• Autumn 1989 First indications that commercial
  property market reaching peak
• Late 1990 Real estate index fell 52 from peak

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Fixed Exchange Rate Abandoned

• September 1992 European currency unrest
• Swedish government abandoned fixed exchange rate
• Considerable depreciation of Swedens currency
• Result Many private sector loans become
  non-performing

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Folding of Nyckeln

• Fast-growing Swedish financial firm
• Financed by several Swedish banks
• Rapid growth by specializing in commercial real
  estate financing
• New commercial paper
• Default left two Swedish banks unable to meet
  capital regulatory requirements

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CRISIS!
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How Bad Did It Get?

• GDP down 6
• Unemployment up 9
• Five of the largest banks insolvent
• Loan losses equal to 12 of GDP

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What to do?

• Early stages ad hoc solutions
• Currency defense
• Crisis spread to entire financial system
• Need for large-scale response

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Key Goals

• Maintain liquidity
• Reduce inflation
• Restore confidence
• Mitigate moral hazard

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Nationalize it!

• Guaranteed entire bank system
• Left out shareholders
• Forced banks to write down losses
• Floated currency
• Bailout money in exchange for equity
• Transferred bad debts to state-run companies
  which sold assets

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Bank Grading
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Asset Management Companies

• Government-run
• Securum (Nordbanken)
• Retriva (Gota Bank)
• Bank-run
• Diligentia (S-E-Banken)
• Nackebro (Handelsbanken)
• Ensured political/financial independence

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Long-term

• Provided avenue for taxpayers to regain money
• Mitigated moral hazard problems
• Total government outlay 4 of GDP
• Recouped most by selling stakes and assets

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LESSONS
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Lesson 1 Nationalization

• Taxpayers and government may get profit when
  markets stabilize
• More public support

Taxpayers Happy
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Lesson 2 Repairing Confidence

• Goal Re-establish creditor and depositor
  confidence
• How? Controversial
• Maintain market discipline by letting investors
  suffer loss (Ergungor Thomson)
• Blanket guarantee to avoid runs and allow
  restructuring (The Economist)

Et voila! Confidence!
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Lesson 3 Let an Independent Agency Take the
Reins

• Sweden established bad banks (AMCs) to take over
  assets of good banks
• Good banks continue under original name
• Deliberate over-capitalization in bad banks so
  bad banks can salvage independently
• Key Political, financial independence

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Lesson 4 Transparency

• Preserves market confidence
• Garner public support

Transparency is cool. Like this transparent
toaster.
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But Beware!

• Swedens schemes may not work for the United
  States

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WHY NOT?!

• Localized financial distress then intl
  financial distress now
• Favorable intl economy then
• Sheer size of US economy
• Political structure