Gillian Tett: Washington is talking to Swedes about banking crisis solutions
Gillian Tett has written in the Financial Times that the Obama Administration is no talking to the Swedes directly about their solution to the credit crisis, suggesting a openness to potential banking crisis solutions. Next week, Bo Lundgren, now head of the Swedish debt office, but formerly a Deputy Finance Minister under Carl Bildt, is scheduled to meet with American officials in Washington. For those of us who see positives in the Swedish crisis solution, this is positive news.
Washington’s Congressional Oversight Panel has summoned Mr Lundgren and others to explain how they fixed Sweden’s banks – presumably to glean tips on what Washington should do next.
The Nordic gods might well chuckle at this twist in the global financial saga. As recently as last autumn, the phrase turning “Swedish” was tantamount to an insult among most American politicians (and on Wall Street, the joke currently goes, Swedish models used to only attract attention when they were blonde and leggy). But these days, as the economist Nouriel Roubini recently observed, “we are all Swedes now” – at least in the sense of using state funds to fix the banking mess.
Hence Washington’s sudden invitation to Mr Lundgren and his colleagues. Whether the Americans will actually like the message that Mr Lundgren and others wish to impart, though, remains to be seen. For many Scandinavian observers are distinctly critical about what the US is currently doing with its banks. In Washington, politicians are wrapping themselves in knots about words such as “bail-out”. But to the Swedes that misses the point: the really important issue is not whether state money is used, but how it is dispersed. After all, as Mr Lundgren notes, “the word nationalisation can have many meanings” – and not all are very effective.
Sweden’s own crisis bears this out. When its banking woes first erupted, Stockholm (like the US) initially responded with procrastination and denial. Eventually, however, it nationalised two banks, wiping out the shareholders, and placed toxic assets into a special “bad bank”. That cost the government about SKr60bn-Skr70bn (although much of that sum was later recouped through asset disposals). To some extent, many western governments are copying elements of this approach. The UK and US, for example, have partly nationalised banks such as Citi and Royal Bank of Scotland. But, thus far, the UK and US have not ringfenced bad assets, preferring to urge the banks to deal with them while still on their books (supported with complex guarantee and financing schemes.) Anglo-Saxon governments have also refused to wipe out shareholders in banks such as Citi and RBS, for fear of looking too “socialist”.
Much has been made of the Swedish banking crisis solution because it involved pre-privatization of two banks and this strikes many Americans as distinctly ‘socialist,’ a term reviled in U.S. political parlance. The Obama administration has repeatedly rejected the suggestion that it would nationalize any of the large American banks. Yet doubt still lingers.
I have suggested that pre-privatization should be a leading option to consider by the Obama Administration in a number of posts:
- America needs a pre-privatization plan (Feb 2008)
- Lessons from Swedish bank resolution policy (Mar 2009)
- The global economy has crashed: we need a comprehensive credit crisis plan (Sep 2008)
- The Swedish banking crisis response – a model for the future? (Aug 2008)
However, I do recognize the need to look at other solutions. Nationalization is but one option. The key is to restore confidence in the system and this may involve guarantees for bondholders which many find unpalatable.
But the more serious criticism lies with what is not being done. While Stockholm was nationalising two banks in the early 1990s, it also offered a blanket guarantee to any investor holding any Swedish bank liabilities (except for shares or subordinated debt). These days, that measure is not well known outside Sweden. But many Swedish officials and bankers consider that guarantee to have been the most crucial decision of all.
Moreover, it remains to be seen how applicable the Swedish crisis solution is to the United States. Two Swedes high in the political ranks during the banking crisis there in the early 1990s have offered very different views on this subject on the site Euro Intelligence, the second highlighted here due to my preference for its analysis:
- Sweden may not be a model – Euro Intelligence
- Lessons from Swedish Bank Resolution Policy – Euro Intelligence
And, indeed there are some very negative consequences to models like the one adopted in Sweden as I argued in November in my post, “The problem with comprehensive banking crisis solutions.” Ultimately, I am heartened by the fact that the Obama administration and the Congress are looking into all available antecedents of the present crisis for potential frameworks. This should give one a renewed sense of faith in the wisdom in Washington.
Insight: US is ready for Swedish lesson on banks – Gillian Tett, FT.com