STOCKHOLM Feb 14 A property bubble, banks
near collapse, a currency under pressure and the future of a
cushy European social welfare state in question.
This is not Europe 2012 but Sweden 1992. And Bo Lundgren,
the fast-talking politician and financial official known as "Mr.
Fix It", who then helped rescue Sweden from its worst crisis
since the 1930s, says history lessons are being forgotten.
Quick moves over failing banks, including nationalisation
and blanket debt guarantees, helped ease a financial crunch. It
proved so successful that Lundgren has found himself testifying
to the U.S. Congress on the model.
It was also mixed with cautious austerity that Lundgren says
avoided the "fiscal trap" facing many European nations in 2012,
combined with deep structural reforms and unified political
leadership that secured Sweden's economic health for years.
"With luck, and to some extent understanding the situation,
we didn't make the mistakes you can see in Europe today ...
believing too much in austerity," said Lundgren, who was
minister for fiscal and financial affairs from 1991 to 1994 and
who now heads Sweden's Debt Office.
From a welfare basket case, Sweden emerged from its crisis
as one of Europe's soundest economies - its public debt halving
to around 40 percent of GDP since the crisis. It weathered a
2008-09 global crunch in part due to this trauma 20 years ago.
There are major differences - perhaps the most important
being Sweden's ability to devalue its currency to boost its
export economy - a tool unavailable for countries like Greece.
But Sweden avoided the political conflicts over austerity
that Greece now faces and steered clear of the fiscal trap that
has led to fears that countries like Spain will be plunged into
a spiral of spending cuts, falling revenues and rising debt.
By 1992, years of deregulation of credit markets had led to
a property bubble in Sweden. With house prices rising, people
were refinancing their mortgages to renovate, or buying boats to
sail at the weekends on Stockholm's archipelago.
Officials paint a picture of a nation at first in denial.
Like the United States later, few predicted how much a housing
squeeze would spark fires in the rest of the financial system.
"I would get phone calls from Riksbank (central bank)
officials and very senior politicians who just did not
understand what was happening," said Knut Hallberg, an economist
at Swedbank who worked in the finance ministry in the crisis.
When that bubble burst, it sparked a credit crunch. At one
point overnight interest rates rose to 500 percent as the
central bank tried to defend a peg of the crown against the
German mark. The peg was eventually abandoned and the crown
The economy contracted by its worst rate since the 1930s.
Banks, on average, lost about 20 percent of their balance
sheets. Unemployment rose to 12 percent.
Arne Karlsson, CEO of Swedish private equity firm Ratos
, said five people he knew committed suicide. He
believes any more austerity would have made things even worse.
"We had a very non-Swedish situation at the time," he said.
"We had a true depression."
For many, it showed how the Nordic region's biggest economy
would be unable to support a cradle-to-grave welfare state that
had hit public finance and discouraged productivity and
Several small government austerity packages tried to paper
over the cracks, but failed.
Realising that this was no ordinary crisis, the government
soon extended guarantees to all bank liabilities. Two of
Sweden's biggest banks were nationalised, part of government
intervention that would cost 4-5 percent of GDP.
It was also a sign of how Sweden rose above party ideology
in a crisis. This was no socialist government, but a right of
centre coalition -- the same coalition that is in power today.
"As you know I am a market-economy, right-wing politician.
But I still believe you can go in and take over the bank for a
short while," Prime Minister Fredrik Reinfeldt told Reuters.
"If they want us to cover their losses, we should also be
part of the game. If you want our money we will take shares from
you," he added. "This is exactly what we learnt in the 1990s. We
did it again in 2008-2009."
In 1992, the government even made private banks pay back
government consultancy fees.
What's done is done -- and Lundgren says Europe missed an
opportunity a year ago in not guaranteeing future loans, and
nationalising some failing banks.
He says the more immediate lesson for the Europe of 2012 was
Sweden's caution over fiscal austerity. While it was painful -
some 5 to 6 percent of GDP - it was spread over several years
and combined with structural reforms that would soon help Sweden
find lasting long-term growth.
Hans Tson Soderstrom, professor at the Stockholm School of
Economics, was invited by the authorities to meet IMF missions
who flew in to Stockholm demanding austerity.
"We had shouting matches. The IMF just didn't see the risks
of too much austerity," he said. "After a while they didn't
invite me back to these meetings."
After the crisis, consumers began to repay debts. The
domestic savings ratio was -8 percent of GDP before the crisis,
but by 1993 it was +12 percent, a shift of a fifth of GDP.
A January report by the McKinsey Global Institute says
Sweden's banking measures were critical to kick-start lending.
It warned cutting spending too aggressively can slow recovery,
as happened in Finland in 1992 amid private debt deleveraging.
"We started out with some kind of rather mild austerity
measures," Lundgren said. "Instinctively we understood that you
couldn't do so much when you have this phase of the private
sector debt consolidation."
"Austerity measures would then only add to the problems we
had. You cannot go to markets and say we are doing austerity
measures, 'Hey, please lower long-term yields',"
Included in the Swedish austerity moves were cuts in housing
subsidies that amounted to 2 percent of GDP and reductions in
grants for the unemployed. Energy taxes were indexed.
When Lundgren was forced to raise revenues, he refused to
raise tax rates but instead closed loopholes, such as tax
For Carl Bildt, who was prime minister during the crisis and
is now the country's foreign minister, the lesson was using the
opportunity to pass structural reforms with a long-term effect.
"Without the devaluation we would have got the same result,
but more slowly," he said.
"But it was the structural reforms that led to Sweden's
long-term health," he added, referring to polices like
abolishing housing subsidies and deregulating
Political unity also helped. The first sentence of the
government press release announcing the rescue of the banks made
it clear it was an agreement signed with the opposition.
Minority coalition partners and the opposition were
generally in accord, despite knowing it was political suicide.
"I remember the last government meeting we had," recounted
Lundgren. "The Centre Party labour market minister said 'Is
there any group in society which we have not made into an enemy
"It was very tough."
Austerity continued after the centre-right coalition lost
power in 1994 to the Social Democrats. Despite being the
founders of the welfare stare, the party also launched austerity
packages amounting to around 5 percent of GDP.
"In the four Nordic countries, there is political
consensus," said Christian Clausen, chief executive of Nordea
, the Nordic region's biggest bank, and also the head of
the European Banking Federation.
"Consensus means that there is a common accepted discipline
around financial policies and how to run the economy."
There are obvious differences - Sweden was a small country
in a growing global economy that could effectively devalue its
currency. A roughly 25 percent devaluation boosted exports and
employment - something euro zone economies like Greece cannot
"We have to be honest and recognise that we benefited from a
weaker currency and global growth helped our manufacturing,"
said Hallberg. He says structural reforms were crucial not only
for helping Sweden grow, but also for convincing markets.
Devaluation is not an option for euro zone members, Hallberg
said. "They have to emphasise structural reforms. There are no
quick fixes. With markets you have to buy time and structural
reforms help that," he added.
Those reforms mean Sweden was well-placed to deal with the
latest crunch. Before the 2008-2009 downturn, Sweden was running
a budget surplus of more than 3 percent of GDP.
Lundgren was much in demand as a speaker in 2009 as the
banking crunch hit, including to Congress. He feels Europe still
needs to learn from the lesson of Sweden.
"You will never be successful in hitting exactly the right
balance, but obviously you have to understand there is a
question of balancing austerity with growth."
"Everyone is saying the banks are the cause of this crisis.
That is not true, it's political leadership."