The Swedish bank crises of 1992 and 2008+

Republished from jimsresearchnotes 2 Oct 2009

Sweden’s Bank Crisis of 1992

The deregulation of the Swedish credit market by the Social Democratic Government in the so-called November Revolution of 1985 removed all Riksbank restrictions on bank lending. This resulted in a property price bubble that burst in 1992. Housing researchers will remember that the first post-war collapse of property prices resulted in a serious problem of “negative equity” in England where since the Right to Buy reduced the available vacancies in council housing, low-income earners have been increasingly forced to buy to get permanent housing at all.

The Bildt Bourgeois Government tried to support the falling value of the kronor by a huge purchase of kronor for SEK 500 billions, but to no avail, and was forced to nationalize Nordbanken (now Nordea), injecting SEK 64 billions into salvaging the bank.

Sweden’s first property bubble only marginally affected Sweden’s smaller and more stable owner occupied sector, but Swedish commercial property values fell by two-thirds. The public ownership of Nordea continues to this day and, giving Sweden’s second bank crisis in 15 years and in which Nordea is once more perilously exposed, there is no prospect in the foreseeable future of re-privatisation to realise the public investment.

One might have thought that this and other banks would have learned the lesson from that bank crisis, but it is clear they did not.

Here we go again…Sweden’s bank crisis of 2008

The 2007-2008 bank crashes in the USA, Britain and Iceland have yet to lead to a bank crash in Sweden, but it is still a close-run thing and there has been and remains much concern over the debt burden of Swedish banks as a result of their aggressive lending in the Baltic States where Swedish banks had established a dominant position. This has historical roots from close relations based on the era of Sweden’s Great Power colonial status in the Baltic region during the 1700s.

According to Sweden’s Financial Advisory Authority Swedish bank lending in the Baltic states amounts to SEK 500 billions. The economies of Estonia, Latvia and Lithuania now lie in ruins and prospects for debt collection are extremely poor. The main banks involved are Swedbank, SEB and Nordea.

As a result of massive mortgage default, Swedbank is now the largest property owner in Latvia. During the height of the mortgage finance bubble Swedbank ran an aggressive TV advertising campaign in Latvia showing a male home owner drilling for oil through the floor of his home, with oil spurting out everywhere (from Svt Dokument Inifrån, Bankfällan – Inside Document – the bank trap, 22 April 2009). The original full TV programme was available until 18 August but all that remains in public is this short TV clip (in Swedish).

Swedish banks made huge profits in the Baltic states during the bubble, as reported in Svenska Dagbladet on 4th June 2009 just Swedbank and SEB made SEK 25 billions out of the three Baltic states in the 5 years preceding the crash.

To save Swedbank it was essential that Latvia did NOT devalue, and it became clear from the above in-depth Swedish TV documentary that the Swedish government, with Reinfeldt and Borg personally putting a lot of pressure on Latvia not to devalue, but to make deep public expenditure cuts instead. To gain leverage for this argument the Swedish Government did this partly by making a SEK 7.5 billion loan to Latvia (article in Swedish only), partly by strong political pressure, to opt for the tougher alternative of drastic cutbacks in public expenditure, which meant draconian reductions in Latvian education, health provision and social security causing incalculable human suffering, at the same time as Latvian taxpayers have had to fund expensive rescue packets for their banks.

In addition, as the Telegraph reports, Sweden contributed to what The Telegraph describes as “overgenerous (in proportion to the recipient country’s size, twelve times more than Latvia’s IMF quota) ” IMF loan to Latvia of 1.7 billion Euros. See also the “related articles” in the Telegraph report, with many countries being given large crisis loans by the IMF and the European Union Central Bank.

It is still doubtful if devaluation can be staved off. The following are just two hits from a search using “Latvia devaluation 2009”

See this report June 2009: (link no longer works without a subscription to The Financial Times:

and this Bank of America Report from 7 September:


Sweden’s bank crisis is still not over. On 2 October Borg warns Latvia (in Swedish only) not to devalue. This Research Note may be updated as events unfold. Here is an English version of this:

5 Oct: and it looks like Latvia is going into economic and political meltdown, with the Swedish government clearly rattled by the prospect of Swedbank going bankrupt less than a year before the next General Election:

The lesson from Sweden’s two bank crises since 1991 is that banks will continue to speculate wildly during booms then run to the government for taxpayer-handouts when the bubble bursts. And while doing this the boards of directors of the four biggest banks are also granting themselves very large bonuses this year: amounting to SEK5.4 billions.

The bourgeois Swedish government has been making public displays of indignation over bank director bonuses and spearheaded attempts to control bank director bonuses both in the EU and G20. But this is just playing to the gallery and won’t solve the problem. The real issue is how to set up an effective international regulatory organ to check the flow of investments such that bubbles can be spotted and prevented. There seems to be no prospect of this happening.


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