Business Irish

Saturday 16 December 2017

Ireland hopes Swedish Mr Fix-It has the answer to banking crisis

Stockholm could have the recipe for financial success

Bo Lundgren led Sweden's bid to save its banking system during the crisis of the 1990s but the decisions taken were not popular electorally.
Bo Lundgren led Sweden's bid to save its banking system during the crisis of the 1990s but the decisions taken were not popular electorally.

Joe Brennan

For an exporting country that's given us Volvo, Ericsson, ABBA and IKEA, Sweden has never quite managed to ship its local delicacy of rotten herring, or surstromming.

The same cannot be said, however, of the recipe it served up in the early 1990s to mop up festering assets in its banking system then.

Stockholm's success in dealing with its crisis -- by guaranteeing bank liabilities, nationalising some of its lenders and creating 'bad banks' to sort out the rot -- has become the stuff of legend as governments around the world continue to struggle to contain the financial crisis.

And Bo Lundgren, the minister in charge of the clean-up at the time, has found himself an unlikely celebrity abroad -- what with his testimony to a US congressional panel, visits to Spain, Germany and Britain in recent months.

"The interest all came as a complete surprise," said Lundgren, who left politics to take up a cushy number in 2004 as head of the Swedish National Debt Office. Aside from the trips abroad, there have been interviews -- and lots of them. The BBC, Fox and CNN have all rented studios with satellite link-ups in Stockholm since the crisis began. "Even Al-Jazeera wanted to know how we handled the situation."

On Tuesday it was Ireland's turn to hear first-hand if the Swedish model was all it was cracked up to be.

After popping up on RTE Radio One's 'Morning Ireland', the man dubbed 'Mr Fix-It' sat through two-and-a-half hours of questioning at an Oireachtas committee meeting, before addressing the Institution of International and European Affairs.

Then it was on to meet Finance Minister Brian Lenihan and officials from the National Treasury Management Agency before boarding a plan for home.

While much of the current financial contagion internationally has stemmed from investments in US subprime mortgages -- through convoluted vehicles such as CLOs, CDS and SIVs -- Sweden's woes, like Ireland's, came from an overheated domestic property sector.

Within two days of taking office in October 1991, Lundgren and his colleagues in a four-party minority government knew it had a problem as savings bank Forsta Sparbanken teetered on the brink.

Guarantee

For almost a year, Sweden tried to deal with problems in individual banks as they arose, before it decided that a blanket guarantee for lenders' liabilities was needed. Lundgren believes that Sweden's success is partly based on the government reaching out to opposition parties to reach a broad consensus on how to deal with the problem. "If you're going to have a financial crisis, it's probably best to have one after an election."

Sweden went on to nationalise two banks, Gota Bank -- Sweden's answer to Anglo Irish Bank -- and Nordbanken, before creating a 'good' and 'bad' bank out of each and recapitalising them to the tune of €6.5bn. That's the equivalent of 4pc of the country's gross domestic product at the time. (Ireland has injected €11bn to date into the three biggest banks to date -- or almost 7pc of GDP.)

Other banks, such as SEB and Swedbank, managed to remain in private hands by creating internal 'bad banks' and raising capital in the market. "We were lucky that ours was a regional crisis," said Lundgren.

Lundgren thinks the thorny issue of valuing loans taken over by the state-run 'bad banks' was made easier by the fact that it already owned the two institutions.

"You (Ireland) must have a valuation problem, in one way or another," he said. Price the assets too high and taxpayers face the risk of carrying the can. Value them too low, and the State could end up having to inject capital into the banks to fill the hole that is left in their balance sheets.

Either way, Lundgren seems to have little time for the "economic" or "through the cycle" valuations -- based on estimated long-term asset values -- Ireland is applying to loans bound for the National Asset Management Agency (NAMA), even if it is in line with EU guidelines.

Toxic

He prefers slashing loans down to the current market prices -- or so-called mark-to-market valuations. "If you do it drastically . . . you are out of the crisis sooner."

As it happened, Nordbanken took a 25pc writedown, or 'haircut', on the €6.7bn of toxic loans it shoved into its 'bad bank', Securum. Gota Bank offloaded €3.8bn of bad impaired loans. NAMA is set to be eight times as big as both combined.

Lundgren says Swedish banks racked up between €20bn and €25bn of credit losses during the crisis, though most of these were absorbed as lenders remained profitable at an operating level. By comparison, the International Monetary Fund estimates that Irish banks' losses will amount to €35bn.

Gota Bank ended up writing off a third of its loan book before the crisis was over. The bank was eventually shoehorned into Nordbanken. "Credit losses for the total (system) amounted to a little less than 20pc," said Lundgren.

By the time the bad banks were wound up in 1996, Sweden had recovered half of its €6.5bn investment. One of the measures it took was to bundle assets called in on impaired loans into five real estate companies, which were floated on the Stockholm and London stock markets.

"The famous London Ark you see when driving from Heathrow Airport into London was the main asset in the company we floated in London," said Lundgren.

Swedish taxpayers have now recouped all their money, through dividends and the staged privatisation of Nordenbank (now Nordea) -- although it is holding off flogging its final 19.9pc stake in the bank until the markets recover.

Lundgren believes there is no point in tackling a banking crisis without addressing the issue of moral hazard -- where bankers and investors take on too much risk on the assumption that the authorities would always bail them out.

The nationalisation of two banks showed shareholders they were entirely responsible for their own risks. Steely-eyed Lundgren also pushed through sweeping management changes in the banks and overhauled the financial regulatory system.

Tough

The banking crisis, together with tough budgetary measures, saw unemployment soar in Sweden from 4.5pc, according to EU measures, to 12-13pc.

The government took civil cases against board members of the same two banks, for breaching internal lending regulations in its property boom. It reached the equivalent of a total €2m settlement at the time, according to Lundgren.

The former minister says tough regulation of the Swedish banks has served them well for over a decade and a half. However, some of its main banks have been sucked into the Latvian economic crisis, having expanded aggressively in the Baltic market in recent years.

Swedish banks have lent more than $75bn (€53.8bn) to Latvia, Lithuania and Estonia, led by Swedbank and SEB.

"Market economies have an inbuilt system to create crises out of a bubble of one kind or another. We're going to have crises in the future." The key to try and avert one, he says, is get regulation right and monitor for risks in the system.

And how was the medicine taken at home at the time? "We were out of government by 1994. You tend to lose elections if you do what we did."

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