Introduction

"It"—where "it" stands for a deep economic crisis—cannot happen here.² This was the common view in Sweden prior to the early 1990s. Why would a depression emerge in an advanced welfare state with a tradition of full employment and strong union influence on the design of economic policies? The economic record was one of stable growth, low unemployment and balanced financial development. Sweden seemed able to merge an egalitarian society with robust economic performance.

But, contrary to the prevailing opinion, “It” happened. In the beginning of the 1990s, Sweden faced a deep crisis, with declining real income, soaring unemployment and large budget deficits. The crisis revealed that the macroeconomic policy regime and the macroeconomic stability after World War II rested on extensive external and internal financial regulations. The capital account controls had isolated the country from the rest of the world and allowed the setting of interest rates and the allocation of capital by the Riksbank, the central bank, and the Ministry of Finance.

In the mid-1980s, Sweden's financial system underwent major deregulation. Sweden rapidly became financially integrated with world financial markets. This process was the main impulse behind a strong boom-bust cycle, with devastating macroeconomic consequences. Sweden entered into the deepest depression of the post-World War II period in the early 1990s.

The Swedish case makes an interesting case study for several reasons. First, the Swedish crisis management in the early 1990s is currently attracting international attention. It is regarded as a model for countries facing collapsing financial systems.

Second, the open and active public debate in Sweden provides us with a wealth of evidence concerning financial liberalization and crisis management. Policymakers, politicians, and bankers have produced memoirs covering this period, giving testimony that is not commonly available for many other countries.

Third, Sweden is a well-developed welfare state with a large public sector, a tradition of good governance, and a high gross domestic product (GDP) per capita. The lessons from a financial crisis in such a society are likely to be of interest to other rich countries hit by the present global financial crisis.

This paper gives an account of the Swedish financial crisis covering the period 1985–2000, dealing with financial deregulation and the boom in the late 1980s, the bust and the financial crisis in the early 1990s, the recovery from the crisis and the bank resolution policy adopted during the crisis. The paper covers three issues: the causes and consequences of the financial crisis, the policy response concerning bank resolution, and the applicability of the Swedish model of bank crisis management for countries currently facing financial problems.

Download this Paper [ PDF 197.4KB| 25 pages ].

Comment(s)

There are [0] comment(s) for this entry. Post a comment.