Tuesday, October 21, 2008

Swedish bailout

Sweden has experience in financial rescue plans (bailouts).

Sweden, which created a model for rescuing troubled financial systems in the early 1990s, became the latest European economy to introduce a sweeping bailout plan to support its banks. Under the Swedish plan, the state could guarantee some $200 billion in bank debt – half the nation's gross domestic product. It also will create a facility to inject capital into banks that get into trouble. Finance Minister Anders Borg said in an interview that he expects all of Sweden's banks to take advantage of the guarantee, though bankers said it was too early to say what they would do.

50% of GDP is a staggering figure, at first.

The CIA World Factbook has Swedish GDP as $338.5 Billion for 2007 (purchasing power parity; $455.3 billion in official exchange rate). The figures for the US are $13.78 trillion and $13.84 trillion.

On reflection, though, 50% of the US's GDP would be about $6.5 trillion. Begin with the monies used to rescue Fannie Mae and Freddie Mac (over a trillion, one and a half?), add $130-plus billion for AIG, $700 billion for the bank bailout, and that adds up to 2.3 trillion. That would seem just the beginning. Indeed, add $540 billion of aid to the mutual fund industry.

There are uh-ohs all over the map here. In Sweden, the first uh-oh is that pony tail on Minister Borg. What is up with that?

Swedish Finance Minister Anders Borg, left, and Swedish Capital Market Minister Mats Odell speak at a press conference. Mr. Borg said he expects all of Sweden's banks to take advantage of the bailout plan.

Interestingly, Sweden has both a Finance Minister and a Capital Markets Minister.

Mr. Borg and other Swedish officials said the measures aimed to restore confidence, and weren't a reflection that any institution was in immediate peril. There was also an element of peer pressure, the officials said; they didn't want to leave the Swedish banks without government support while competitors in other nations accepted helping hands.

"Everybody should be doing this," said Mr. Borg, urging other countries to stand behind banks because the more they did so, the more credible Europe's determination to stanch the financial crisis would be.

Bush and Paulson and Bernanke were too late in acting. Better to act early.

Sweden has faced financial crisis before. After a long period of low interest rates and lax supervision led to a surfeit of questionable loans, Swedish property prices plunged in the early 1990s and five of its seven biggest banks sought capital injections. Sweden guaranteed its entire banking system, insuring creditors and depositors – but not shareholders – against losses and eventually doled out state aid then equivalent to 4% of the nation's GDP.

Swedish authorities used the old laws from its 1990s financial crisis as a template for Monday's plan. "We learned then that the pillars of any solution are, first, to restore confidence in the financial sector, and second, to recapitalize the banks, if needed, to minimize the credit crunch," says Bo Lundgren, who now manages Sweden's debt agency, which will administer several portions of the new bailout package. Mr. Lundgren was minister for fiscal and financial affairs during the prior crisis. "These two things you have to do if you want to minimize the eventual cost to the taxpayers."

Of course, they're socialists, no? Utter nonsense.

Analysts and officials argue that Sweden's 1990s plan made the country's economy and banking system more resilient. Swedish banks, for instance, largely skirted the U.S. subprime-related investments that started the current turmoil, thanks to stricter in-house management and supervisors' sensitivity to portfolios that were heavy on risky bets.

Strict management and supervision: what magnificent ideas. Practical, too.

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