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THE WÄSTBERG CHRONICLES

FINANCIAL CRISIS

Banking on the new Swedish model

Olle Wästberg, Director General of the Swedish Institute reveals some insights garnered from his inside track in the early 1990s to the bone-shaking Swedish banking crisis and its eventual resolution.

Banking on the new Swedish model

“The Swedish Model” was an expression coined during the 1930s, especially through the book Sweden: The Middle Way, a best seller by journalist Marquis Childs 1936 in which Sweden was portrayed as a lucky combination of two political systems and a country in a state of balance. This was particularly true of relations on the labour market.

Times change. Nowadays when international newspapers and magazines write about “the Swedish model,” it alludes to the way Sweden managed the financial crisis in the beginning of the 1990s.

Back then, the banking crisis was handled by the then Minister of Fiscal and Financial Affairs Bo Lundgren (now Director General of the Swedish National Debt Office), his State Secretary Urban Bäckström (now Director General of the Confederation of Swedish Enterprise) and the leading civil servant in the field Stefan Ingves (now Chairman of the Riksbank). As State Secretary of Finance in the early 1990s, I had quite a good view of the process.

In the current situation, with many financial systems on the edge of an abyss, what happened in Sweden is often described as a model for other countries. When banks – and other financial institutions – don’t dare to finance businesses and private citizens in need of loans, the economy stops. The result is: no investments, free-falling real estate, less consumption and growing unemployment. The banking system is the key to economic recovery.

In 1992 Sweden did basically two things:

– The government guaranteed the deposits that brought about a renewed confidence.

– Non-performing bank debts were transferred to “bad banks.” That made the ordinary banks clean and sound, and they could start to perform. The bad banks sold off their depreciated assets in a couple of years and most of the money was regained over time.

The bad banks system is sometimes described as a Swedish invention. It isn’t. Sweden had learned from the US savings-and-loans debacle in the 1980s, and adapted the idea of bad banks from Texas. In a way, this was part of a tradition that includes modern political parties, mail-order business and curved harrows – there are many examples of inventions from the United States that have been brought to Sweden to be refined and then re-exported.

The problems now facing the international financial system is much bigger in both scale and structure than the Swedish crisis in 1992. In Sweden, the government had to take over the worst two banks. That implied that the government was on both sides – the bank and the bad bank – in estimating the value of the failed assets. The process could be smooth and fast. My guess is that American lawyers on both sides will make it a bit more complicated.

Anyhow, Sweden avoided a meltdown of the banking system, which was terrifyingly close. The orderly way in which this was done might be a “Swedish model”. For other countries where banking paralysis is now preventing the economy from starting up again, this may be something to long for.

Olle Wästberg, Director General of the Swedish Institute

FINANCIAL CRISIS

US investors buy up north German state bank hit by financial crisis

Two German states said Wednesday they would sell troubled maritime lender HSH Nordbank in the first full privatisation of one of the regionally-owned "Landesbank" lenders hit badly by the financial crisis.

US investors buy up north German state bank hit by financial crisis
Photo: DPA

Leaders from Hamburg and Schleswig-Holstein states said at a news conference they would sell their 95-percent stake for one billion euros to investors led by two US funds, J. Christopher Flowers and Cerberus capital.

The European Commission ordered a change of ownership in exchange for its approval in 2009 of a €13-billion-euro rescue – one of two taxpayer-funded bailouts for the north German bank since the 2007-2008 financial crisis.

That rescue plan helped cover risky investments amounting to €60 billion, most of them in real estate and the shipping sector, which HSH built up in the pre-crisis years.

“Today we've reached an important milestone on the way to selling the states' holdings in HSH,” which had over the years proved “very costly to the taxpayer,” Schleswig-Holstein state premier Daniel Günther said.

Wednesday's deal must still earn a green light in a further competition probe by the Commission and from banking supervisors at the European Central Bank.

If it goes ahead, “the privatisation means that we can limit the damage to the states that has resulted from the bank's irresponsible strategy of expansion between 2003 and 2008,” Hamburg mayor and future federal finance minister Olaf Scholz said.

The sale was immediately criticized by Sahra Wagenknecht, leader of Die Linke (the Left Party), who described it as a gift to “the finance mafia.”

“Future profits will be privatized, tax payers will lose multiple billion euros and jobs are at risk – whoever calls that a success doesn't deserve to be finance minister,” she wrote on Twitter.

Hamburg and Schleswig-Holstein have taken on a portfolio of HSH's bad loans, meaning taxpayers could face a bill of up to €7 billion when they are eventually sold to private buyers.

The contract for Wednesday's sale also provides for HSH's payroll to be halved, to around 1,000 workers.

HSH's departure into the private sector leaves just five of the “Landesbank” lenders standing after a series of post-crisis interventions.