Sweden’s Lessons for Managing Financial Crisis

STOCKHOLM – Although Sweden is a small country, its experiences managing its financial crisis of the early 1990’s may provide valuable lessons for others.

The Swedish crisis began in 1991 with the first major insolvency in the financial market. A number of damaging developments followed:

• Most of the banking system fell into deep crisis. One bank went into liquidation, while the rest of the system required extensive governmental emergency aid.

• Property values fell by approximately 35% over four years. Equities fell by 55% over a three-year period.

• Despite the central bank’s 500% interest rate, it was impossible to defend the Swedish krona, which was pegged to the euro’s forerunner, the European Currency Unit or Ecu. The krona depreciated by around 25% in the autumn of 1992, a year after the crisis began.

• The crisis triggered a sharp economic downturn. GDP fell by 7% over three years, and unemployment rose by 7% over five years.

• During a three-year period, government debt increased by about 50%, with the public deficit reaching 12% of GDP. Falling GDP led to declining tax revenues, while rising unemployment led to an automatic increase in public expenditure.

Although the crisis that began in the United States in 2007 has since spread worldwide, the outlook for the US economy is clearly crucial to eventual global recovery. If we assume that the US is experiencing a typical financial crisis, GDP will fall this year as well. Unemployment can be expected to peak around 12%, and gross public debt will have increased by 50%, which corresponds to around 90% of GDP.