JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE díospóireacht -
Tuesday, 7 Jul 2009

Sweden’s Financial Crisis: Discussion with Bo Lundgren.

Chairman

The purpose of our meeting is to discuss and learn from Sweden's handling of its financial crisis in the early 1990s and we are privileged to have Mr. Bo Lundgren here this morning. As members will be aware, he was the Minister for Fiscal and Financial Affairs during that period and he is currently the director general of the Swedish National Debt Office. I welcome him to this meeting and thank him, most sincerely, for travelling to give us the benefit of his experience, and that of his country's experience, of a financial crisis such as we are facing now.

Members are reminded of the parliamentary practice that they should not comment on, criticise or make charges against a person outside the Houses, or an official, by name or in such a way as to make him or her identifiable. I also draw attention to the fact that members of the committee have absolute privilege but this does not apply to witnesses appearing before the committee. I invite Mr. Lundgren to make his presentation and afterwards we will have a question and answer session.

Mr. Bo Lundgren

I thank the committee for the invitation. I left public service, as a member of Parliament, in 2004 but it is always nice for an older member of the Swedish Parliament to visit former colleagues here. I shall try to be as brief as possible but it is easier to give some introduction as well. I first point to the differences between what happened in Sweden at the beginning of the 1990s and what is happening today not only in Ireland but in the world. The crisis was much smaller. This is a global crisis with the US being the epicentre but the size of the crisis in Ireland is not that different.

The complexity of the components is a problem since there are securitised instruments as toxic assets instead of the plain vanilla loans. We had plain vanilla loans, commercial real estate as collateral and some business problems but I think that is similar to the situation here. It was a regional crisis, with the financial sectors in Finland and Norway also in crisis, but not in many other countries. However, we had the currency crisis in the European context.

When it came to the turnaround of the crisis we had the advantage of being an exporting country. We had a peg to the European currency unit but we had to let that go in November 1992 which meant that we could profit, even if we had a cost disadvantage, by a devaluation of between 5% to 10% which helped us when the global economy arrived. Obviously the turnaround was quicker and much helped by this devaluation. These are the main differences.

The cause of the crisis was deregulation in 1985 — too late in a way. Deregulation in an overheated environment with high inflation meant that speculative forces came into play and we had a great deal of speculation, mainly in commercial real estate. Households borrowed a great deal of money but when the bubble burst in 1989 and 1990, it was mainly the speculative forces that were responsible for bank losses as households tried to keep their houses and repay their loans. That was the cause of the downturn in the real economy which was accentuated by what happened in the financial sector. With household income going to paying off debt, the loss of domestic demand lead to three consecutive years of negative growth in the Swedish economy of minus 2% each year in the years 1991 to 1993. I know that my presentation was circulated to members but the third diagram shows the structure of the Swedish banking system. We had seven large and medium-sized banks and 100 much smaller savings banks at the start of the crisis. The seven banks controlled 90% of the market. The four banks at the top of the diagram Nordbanken, SEB, Swedbank and Handelsbankern are still in existence and managed. The Nordbanken was partly owned by Government which held 77%. The three other banks, Gota bank private, Första Sparbanken, First Savings and Loans bank, and a small farmers' bank have been assimilated into other banks.

In my presentation I set out the course of events, but I will not go into the cause of the events. When the bubble burst we did not know the extent of the crisis and we handled it case by case — the government majority owned bank and of the First Savings and Loans bank. In spring 1992 we realised the systemic crisis emerging when we saw the credit losses in the Nordbanken and understood we had the same problem in the other banks. In spring 1992 we prepared for the total loss of confidence that tends to come with a systemic crisis and trust is totally lost. We handled the crisis between September 1992 and September 1993, and made most of the decisions on capitalising the banks and the bad banks. By 1994 the system as a whole was profitable again and we abolished the crisis legislation in 1996.

Even if that situation is different from the situation today, there are always common challenges. We studied what happened in the Savings and Loan crisis in the US and what happened in 1932 and 1933 in the US as well before making our decision on our package of measures. We found that there are some common challenges that have to be met to handle the situation. For a Government it is mainly a question of being able to avoid or minimise a credit crunch that is always the result of a banking crisis or a crisis in the financial sector. To do that one needs to do three things. It sounds easy but it is difficult. One has to maintain liquidity in the system, that is taken well care of by the Central Banks all around the world today. One has to restore confidence, which is a matter for Government, because Government intervention is unavoidable if one has a systemic crisis. One has to restore confidence in one way or another, especially the confidence of the investors. Those that fund banks need to understand that they cannot lose money on funding banks. I am not talking about shareholders but creditors and bond holders and so on. Lehman Brothers is an example of what happens if confidence is lost. We had the same situation in September 1992 in Sweden. One has to restore the confidence of the management of banks so that they will be able to manage the situation and will resume lending. The third thing is to restore the capital base. Obviously if one had excess lending the former capital base might not be required in the future but one has to figure out what kind of base for lending is needed to get the economy going because all stimulant packages and other things will not work well if one does not restore the financial sector to working order. One needs to restore the capital base to what is needed. It might not be the same as the base before the crisis.

When we came to the point where we needed to apply a comprehensive package, we had already done a case by case study of some of the banks and we changed some rules to get a grip and to be transparent. We wanted to have rules that banks when reporting their position had to use Mark-to-market valuation on collateral for loans. We strengthened the rules even before we had the comprehensive package. We abolished the property tax on commercial real estate to try to stop prices falling. Since we had a tax, we had the option of using that measure. We also tried to get political consensus. We were a four party minority government with the populist party on the right. Populist parties are not always on one side as they tend to go all around depending on what the electorate wants. For us it was a necessity to have political consensus and we formed a kind of coalition on these issues with the social democratic party. It worked quite well both personally and otherwise. That affected the way we built the organisation later on. We did the work in the ministry of finance but we informed and had discussions with the social democrats all along. That is something that is needed. Leadership in the American Congress is rather weak and that hinders the American administration from doing things that it should do. That is my view anyway.

We presented a comprehensive package in September 1992 when we had a total collapse in confidence like Lehman Brothers in the US suffered last September. It was due to the currency turbulence in the medium-sized Gota Bank going bust. We had to guarantee the creditors of the bank and then suddenly one saw the spreads widening immensely and markets stopped working and we had to put the package into effect. The main ingredient to restore confidence was a blanket guarantee for all creditors, not for shareholders, not for perpetuals but for all creditors and all depositors. That gave immediate confidence, even if we had to explain the situation. That can be achieved in other ways. In 1933, President Roosevelt with the help of the former administration closed down all US banks for one week and then reopened the banks that were solvent. That gave back confidence to the banks and the banking system even if they had more problems in the US economy at that time. We also said that under the umbrella of the blanket guarantee we needed to be able to support banks since most of the big Swedish banks needed some kind of support. We got parliament to give us unlimited economic frames to go in with capital injections, mainly equity in that respect, provide guarantees or whatever measures were needed to handle the situation in different banks.

The unlimited economic frame was there but we did not want to go back to parliament and ask for too much money to be safe — we got all we needed — because that could have given the impression that the crisis was even greater than people thought at that time. We did not take too little because that would have meant we would have had to go back to parliament to ask for more and then there would have been another crisis feeling. That was possible since we had the support of the opposition and it could see what was happening at that time.

We also implemented rather tough legislation, not immediately, when we found out that banks like soft money, with little or no conditions. We implemented a rule that provided that the Minister for Finance and, later on, the Bank Support Authority, could go to a special court with three judges and ask for a decision regarding a proposal even if the bank with whom we made the agreement would not accept that. Therefore, we could decide if the bank needed support and if the bank said "No" we could go to this court which could decide. This instrument gave us a good negotiating power with the banks. One could always argue the democratic views on that but if there is a crisis there is a crisis.

Transparency was vital. At least every six months I appeared before the parliament and had an open debate on what was happening in regard to bank support and so on. We tried to be very transparent in regard to what was happening.

The title on the next slide is organisation. Under parliament, there is the Government and the Central Bank. As we saw it, the Central Bank should not play any active part in handling the individual bank problems. Its task was to ensure the macro-economic financial stability and to be a lender of last resort to solvent banks. If banks were insolvent it was a Government problem to handle. We had the National Debt Office to which to furnish the money and at that time it did not play any other role. The Financial Supervisory Authority, the FSA, had been involved before we took office, in handling some of the prelude to the crisis. That meant it lost some of its credibility as a supervisor which meant I had to change leadership. Also we did not want the FSA to be involved in handling the acute crisis in banks so we started doing it in the Ministry of Finance. The present governor of the Swedish Central Bank, Mr. Stefan Ingves, was at that time a head civil servant and head of the financial market department. He headed this task force within the Ministry of Finance where most of the decisions were taken. We also started preparing for this task force being a new authority, the Bank Support Authority, outside of the Ministry. One of the reasons for this was that I could have a board on that authority which comprised two Social Democrats, whose position was represented within that authority. Even before its establishment it was possible for people to look at what was happening within the Ministry of Finance and in the task force. The Bank Support Authority was quite helpful.

Decisions on capitalising banks, bad banks and so on were still taken by the Minister for Finance but proposals were coming from the Bank Support Authority which worked closely with the Central Bank and the Financial Supervisory Authority. That was the organisation of it.

With regard to bad banks, asset management corporations, we only used that concept with the banks that were nationalised since valuation was not a problem because we owned both the good and the bad entity. It is always a problem if one buys assets from private banks. The down side is for the taxpayers where there are problems with valuation and so forth. Banks could apply for support and where they did we went in with consultants and conducted an evaluation of the situation in the bank with a valuation board that helped us to check the valuations made by the consultants and so on. Even if the private banks managed to get out of our grip, due to tough legislation and the turnaround in the economy, that was what was needed, they repaid all consultant fees.

The bad banks arose mainly because management should concentrate on either good banking or bad banking. We did not want all the bad assets coming on to the market at the same time which would depress prices even more. We thought that a longer time period would allow us to recover more of the values, which was true. We had a total outlay of a little more than 4% of GDP in 1993. Five years later we got back from these bad banks approximately half of that amount and from the nationalised Nordbanken (Nordea), due to dividends and the selling of some shares, in absolute terms we have recovered everything. On the other hand there was an alternative scheme under which the bank would have performed better and we would have had a profit from that. Obviously there was a cost to the real economy.

This is a broad introduction to what was happening.

Chairman

I thank Mr. Bo Lundgren for his presentation which I am sure has raised many questions. For those members who were not present at the beginning, we have agreed that each member would initially ask two questions so that everybody will get an opportunity to put his or her questions. Deputy Burton was first to offer.

Deputy Joan Burton

I welcome Mr. Lundgren who is famous in political circles in Ireland because when we had our crisis many people referred to him. It was interesting to hear his commentary on what actually happened in Sweden. There are two particular areas about which I would like to ask. I saw his testimony before the United States Congress. In that testimony, as here this morning, he laid some emphasis on political co-operation and cross-party co-operation, which he referred to as political consensus between his party and the Swedish Social Democrats. Alongside that he mentioned the issue of transparency. Can he tell us more about the political consensus and what his description of transparency involved? In Ireland we have a system where the amount of information that is traditionally available, through committees of the House or through Government to Opposition, is rigidly limited. It would be interesting to hear Mr. Lundgren's definition of transparency and whether the political consensus was built on sharing information and the availability of information to people in the Opposition parties. Was that consensus structured, was it informal, did it last during the period of the arrangements for rescuing the banks?

A concept that has developed in Ireland and in several other countries and I think it was debated in the US, is the notion that banks are either too big or too important to fail. Does Mr. Lundgren agree with that concept? I noticed when he was describing the numbers of Swedish banks at the beginning, clearly, afterwards some of the banks were nationalised. Was that because they were failed entities? It appears from the diagram that some banks subsequently were merged with other banks. Was that because that made business sense and did the Government and the authorities force it.

When Mr. Lundgren spoke of the valuation of the assets through the bad bank, was one of the reasons for the nationalisation, or was it an effect of nationalisation, that it was easier to have the bad bank because the valuation issue was easier to handle? If I understood him properly, he also stated that valuers went into the banks which were nationalised where the valuation was not a problem, but also to those banks which were not nationalised but which were in receipt of Government support. There have been suggestions that the Swedish national debt office's valuers erred on the tough side of a hard valuation rather than a kind of hopeful long-term expectant valuation and that, and as Mr. Lundgren stated, the office was taking that approach to preserve and up-side some recovery for the taxpayer, not necessarily a profit but at least a significant recovery over time of the moneys advanced. Those are the two issues to which I ask Mr. Lundgren to refer.

Mr. Bo Lundgren

I will not comment on the Irish situation since I am not familiar with that. I do not really know how the politics is playing out. Obviously, Ireland's crisis is deeper and bigger than the crisis we had. We would have the same situation today, a bigger crisis. At that time, the total balance sheets of the banks were 120% of the Swedish GDP. I think it is much more than that now in Ireland and it is a little more than 200% now in Sweden. It is a different situation.

Political co-operation was a necessity for us. It would not have been feasible for us with a four-party minority Government with no support from any other party in parliament, to go out and do what we did. One would never know when the support of the populist party could disappear so one could not do any business with it. We needed that kind of support and it was also easier to get it because it was just after an election. I always try to advise countries to have banking crises after elections than before elections. One could see the effect in the US Congress. That is one of the reasons the fact that the Americans have elections every two years is a problem for them. It was a necessity for us to have consensus to do what we did.

It is always good to have information, and give it. My successors politically, who are in government in Sweden, are somewhat hesitant to give all of the information to the Opposition but they have a majority Government and it is a decision they make — I have nothing to do with that.

It is good to have political consensus. It gives better strength in the long run. If one has elections, government might shift and confidence might not be restored that easily without consensus.

On transparency, since we had this co-operation with the Social Democrats, we informed them, both unofficially and officially. At the beginning I spoke with a former Minister of Finance who was economic spokesman for the Social Democrats, and we were in agreement. We just made a deal. There were no written and formal agreements but when we did the first savings and loans a couple of days after I took office, for instance, we phoned each other and he stated that of course they had to help out with this one. I could go out in a press conference and state nobody has to be afraid of losing any money from what is happening in this bank. Then I had the Social Democrats and could say that as well, and that helped.

Later on, with the bank support authority, and even before that, I asked the former vice-prime minister, Odd Engström, to be the chairman of the bank support authority, and he was employed as a director general in the Ministry of Finance even before that. He became a good friend, not for political purposes, but did a hell of a good job. I am sorry about using the bad language. Therefore, that was formal in one way and informal in another. He had contacts with the leader of the Social Democratic Party at that time. It was unofficial and it was official as well.

Transparency, for me, also means other things. It means requiring that banks really display their problems. To my mind, at least, one of the causes of the long duration of the Japanese banking crisis — 15 years approximately, from 1990 to 2005 — was the lack of transparency. I was in Tokyo in 2002 and spoke about the Swedish handling of the banking crisis. I got the impression that the valuation of assets in banks was not really marked to market, to put it mildly. In a way it was more, well, as you choose. That made analysis of the Japanese banks' situation go from being very disastrous to rather, if not good, not that bad. It was very difficult and nobody knew. One then had uncertainty which is what nobody likes in such times. Transparency, to me, is also marked to market, and has to be very strict anyway. I will come back to that later on.

On being too big to fail, it depends on the situation. If one has a systemic crisis, even a small institution might be too big to fail. After Lehman Brothers, we nationalised a small investment bank that failed due to legal reasons. It had some liquidity problems as well, but mainly it was because of the legal problems. It did not follow the rules. The bank had to liquidate. Should we have taken over? We took over, nationalised and resold in May, and it is already privatised. However, we, in Sweden's stability council, which includes the Ministry of Finance, the Central Bank, my debt office and also the FSA, were afraid that we could have a mini Lehman Brothers in Sweden if creditors lost money on this investment bank and, therefore, we went in and nationalised it. That was too big to fail, even if normally we would not have done anything about it. Therefore, it is very difficult to say when it is too big to fail.

On valuation assets, as we did asset management corporations and bad banks — with only the ones we nationalised — valuation was somewhat easier. We tried to do it as correctly as possible anyhow because we left some of the bad loans in the Nordbanken in order to not have too much of a problem with competitive power against the other banks. Since private banks had problems, we tried to be as competitively neutral as possible, even if it was difficult. The ones we took out we wanted to value to see what was left and what would go to the bad bank.

When it comes to the private sector, all banks except one applied for support. If one applied for support in this programme we had, then one had to open up all one's books. We used mainly consultants. We had two consultants to have two opinions on valuation on the situation in the banks, and we had this valuation board that included mainly specialists on valuation of real estate.

Deputy Joan Burton

Could Mr. Lundgren expand a little on the membership of the valuation board?

Mr. Bo Lundgren

I think it included four, five or six people who valued real estate one of whom was professor at the Stockholm technical university. They were not politicians. They were experts on real estate and valuation problems. To be honest, I do not remember exactly who else sat on that board.

They were the ones who could oversee correct valuation. When there was a market, we did mark the market valuation from a conservative point of view. We also used cash flow capitalisation if that was feasible in different instances. When it came to business we had to do that because 80% of the collateral was real estate and 20% was business affiliated.

There were questions regarding whether we should say "These properties should regain value if one waited five, six or ten years", which the Japanese did. Obviously, sooner or later the value will increase, especially if interest rates go down as they did in Sweden. On the other hand, if one wants to handle the situation immediately, then one is interested in the present value. One might be able to recover some value but then one can do that later on. It is difficult to say. Probably, if the value is 100 now, it was 200 and has gone down to 100, it might be 150 in five years. Who can say? Nobody knows. Even a member of parliament asked me whether we could do a more loose valuation. I said I would not do that. It was easier perhaps in our situation. It is difficult to say. I think that answers the Deputy's questions as well as I can.

Deputy Michael McGrath

I welcome and thank Mr. Lundgren for appearing before the committee and imparting his experience of the Swedish banking crisis. Perhaps I can focus on a couple of issues, particularly the length of time it took Sweden to work its way through the crisis. Mr. Lundgren presented a slide showing the timeline from what he regarded as the prelude in the autumn of 1990 to the end in the summer of 1996. Effectively, it was a six-year process to work through what was a regional crisis in the banking system at that time. Given that the crisis of today is very different in that it is a global crisis, what is Mr. Lundgren's estimate of the length of time it will take a country such as Ireland to work its way through the banking crisis? I know he is familiar with the steps that have been taken here, the initial guarantee, the recapitalisation of two of the banks, the nationalisation of one and the establishment of the National Asset Management Agency. Given that the scale and depth of the crisis is very different, I would be interested to hear his view on the length of time it is likely to take. Perhaps he will comment on the measures that emerged from the Swedish crisis. Has the banking system there been in a much better position to withstand the global crisis that has taken place since last year?

In regard to the regulatory system and the lessons learned in Sweden since the crisis in 1990, Mr. Lundgren presented a slide setting out the role of the Financial Supervisory Authority and the Bank Support Authority but will he crystalise for us the lessons he learned and the key principles that must apply which were implemented in Sweden and which clearly worked so well?

Mr. Bo Lundgren

It is difficult to say how long it will take to get over this crisis. It will differ from country to country. I was in Madrid on Saturday where obviously there are many problems and house prices have started to go down. They foresee another two years before reaching the bottom. Ireland should be at the bottom hopefully and should be at, say, February 1993 levels. In 1996 we abolished the guarantee and said we would only do so after a parliamentary decision, with ample warning, to increase the credibility for the guarantee which meant that the crisis was over, in effect, in 1994. Ireland should be able to get the system in order in a year or two but on the other hand it will have some crosses to handle. We had that until 1997 when we finished the operation of the bad banks. We thought we should continue that for another five or ten years. It is difficult to say how long it will take. Ireland should continue to handle the bad assets it might acquire for as long as is needed to recover as much as possible on the value, at least for a reasonable time period.

On the question of what happened with the Swedish banks, they learned the lesson. We improved other things as well, such as budget control and pension reform which came about as a result of what we learned during the crisis. The political system learned some lessons. The Central Bank started with stability reports which we did not have previously. My deputy Minister became governor of the Central Bank in 1994 and took with him a good deal of knowledge. The Central Bank started to work on financial stability to a greater extent than previously. We also demanded better risk management from the Swedish banks and we had much regulatory reform in the small sense. When this crisis commenced we had a good grip on what was happening in the Swedish domestic economy and the banks were very conservative and did not do any business with CDOs, or at least not much, so we did not have that problem, and neither does Ireland.

As members may be aware two of the banks were rather aggressive in the Baltic countries which means that two of the banks Swedbank and SEB, are heavily exposed. On the other hand the economies of these countries are quite small so with a rather good stress test — not the test conducted by the US that was to be a baseline for Nordea mainly — and if it proceeds as we think, we will be all right with €75 billion. We did one with huge losses in the Baltics with all loans that existed at that time. Even then the worst hit bank would have a capital adequacy ratio of 4.4 which was over the legal requirement. They might need some capital injection from us. They made mistakes in the Baltics. One of the problems was that we had no real view. We could understand that there were problems but for the Central Bank doing the financial stability report it was mainly Swedish macro. There is not that much Latvian macro, so there was a problem with the cross-border operations both for the banks and the supervision that we did.

On the issue of the system, I believe, so far at least, that the division of tasks between the Central Bank, the Ministry of Finance, an agency such as the Bank Support Authority and the regulator, the FSA, is good as each one has a task. We also have a stability forum which consists of top officials from the Ministry of Finance, the National Debt Office, such as myself, the head of the Regulator, the vice governor of the Central Bank responsible for financial stability. We meet whenever there is a crisis, every day if needed, otherwise once a month or once a week. At present it is run every week and by phone conferences and so on. That is the best organisation as I see it. My deputy, who was then governor of the Central Bank and is today head of the Federation of Swedish Industries, believes the Central Bank should do everything. We are arguing that issue but it will give members of the committee a picture of the debate in Sweden. He is alone so far in the debate. There is the US and the British discussions but I still tend to think that the division of tasks is a good thing.

Deputy Kieran O’Donnell

I welcome Mr. Lundgren before the committee. To put the matter in context, will Mr. Lundgren tell the committee the actual amount the state put into the banking system in Sweden, the percentage of GDP and the percentage it added to the national debt? In the Irish context we are talking of the order of between €50 billion and €80 billion which is approximately half the national debt and up to half our GDP. Mr. Lundgren said that its make-up was 80% real estate and was commercial in orientation. In the Irish context it is primarily residential, although there is a commercial element. What was the residential nature of the debt in terms of the banks in Sweden? Did the Swedish National Debt Office take warrants in the banks and, if so, did it gain much on Swedish taxpayers? How much did they gain as a result of privatisation of the banks in regard to the uplift and was that regarded as a key feature of the scheme?

In the Irish context one of the key negative aspects of the crisis, which has come from the property sector, is the lack of a flow of credit to business. How was this issue dealt with in Sweden in terms of funds flowing to small business? Did the model put forward in Sweden work? If it were to happen again would the Swedish National Debt Office have done anything differently?

Mr. Bo Lundgren

I will start with the final question. Probably we would have, but to be honest I do not know what. When we did the first savings on loans we should have been a bit tougher. On the other hand we were in negotiation since the savings bank has no owners. Therefore, we had to make a chicken race negotiation with the other savings banks to get them to take it over. Ireland may probably have done some things better than we did but I have not really thought too much about that.

The lack of flow of credit is the main argument for governments to be involved. If there is a crisis in the financial sector and nothing is done about it there is a credit crunch and that will affect everyone. What is needed is to restore the financial system as quickly as possible and the banks system has to be capitalised. We are not talking about restoring the capital base, perhaps not to 200% as before, because there might have been excesses but, say, to a certain amount. That kind of capital base is needed to have that amount of lending in the economy. One does not need the same institutions, they can be completely different institutions. They could even be nationalised institutions or new institutions built by Government and so forth. Obviously, the base is needed, not the institution per se . Therefore, liquidate the bad ones. If they are liquidated they may take a base with them, hence a base must be increased elsewhere.

Deputy Kieran O’Donnell

Was there an orderly wind-up of financial institutions in the overall Swedish scheme?

Mr. Bo Lundgren

Yes, at one bank, Gota, that medium-sized bank was liquidated. We put the bad assets into one other bank. We had two bad banks, Nordbanken and Gota Bank. We liquidated the bank and had a public offering which would acquire the viable thoughts of that bank and we discovered that the best option was to merge it with Nordbanken which formed the start of what is known as Nordea today and it increased value there to some extent.

Deputy Kieran O’Donnell

Through the court system, was the Swedish National Debt Office able to insist and force the banks to merge and, if so, did that provide the tool to ensure the banks did what was best in terms of the overall restructuring?

Mr. Bo Lundgren

It gave me a tool but it was never used. However, it was a good tool in negotiating with the banks especially SEB and Swedbank because they understood we were serious and they managed to get the private equity needed. We paid all the consultant fees and so on and they made the merger themselves. Swedbank was just formed by savings banks, ten together, as simulating the first savings and loans, also taking the smaller Föreningsbanken later in the timeframe. We did not do more. We had a discussion on whether to liquidate and close down Nordbanken but since we wanted a structure with not only a few banks we decided to keep and capitalise Nordbanken and handled it the way it was. That move was criticised by the only bank that did not ask for Government support, Handelsbanken. On the other hand, without a Government blanket guarantee it would not have survived either. Therefore, we had to do that.

Deputy Kieran O’Donnell

What amount of funding did the Swedish taxpayer put in?

Mr. Bo Lundgren

I will come back to that issue. The flow of credit is a vital question for government. Even if they have a capital base the bankers also need to be confident. Even if there are new bankers, and one has to get rid of the old ones, they have to be confident that markets are there and one has to persuade them. One cannot decide that they should learn, one has to talk all the time at conferences to bankers and so on and tell them what the Swedish National Debt Office is doing and urge them to take their responsibility. On the other hand if there is a downturn in the economy, many of the small businesses that need credits are, perhaps, not in a condition where they should have them. There is also a VAT problem. Obviously, if the volume of credit goes down, in the event of a downturn in the real economy, that becomes an issue.

The total cost exposure was €7 billion and the total outlay in money was €6.5 billion, which amounted to just less than 4.5% of GDP. The big cost in the Swedish economy was the effects of the households repaying and their diminishing demand which meant there was a downturn and huge deficits in the economy. The top deficit was between 12% and 13% in 1995 because that came after a turnaround in the financial sector. The deficit was 12% to 13% due to the lack of a private savings ratio which in 1990 was minus 8% of GDP and was plus 12% of GDP in 1993. In three years there was a shift of 20% of GDP, which is rather tough for an economy to handle. That is the main cost for the real economy of the crisis. We recovered through the bad banks part.

Deputy Kieran O’Donnell

I will finish on this point. The overall level of funding that the state put in of taxpayers' money into the financial institutions was a large amount but in terms of a percentage of GDP would not compare with the Irish situation.

Mr. Bo Lundgren

No. Ireland is in a much worse position. Our total balance sheet was approximately 120% of GDP while Ireland has much more than that and has larger problems as well.

Deputy Kieran O’Donnell

How did Sweden control the flow of assets on to the market in an orderly fashion to avoid a complete reduction in the price of the assets? We are talking about the establishment of the National Asset Management Agency, NAMA, which effectively will be the largest landlord in Ireland which could be valued at up to €90 billion even though it might be bought at a lower cost. Given that the valuation is critical, how did Sweden control the flow of assets on to the market?

Mr. Bo Lundgren

We had a rule beforehand saying that the banks could only hold collateral they took for loans that were not performing for three years. We changed that rule so they could keep the assets much longer. We had a ten year period and that is what was needed. We gave that to the Government-owned bad banks but also all the private banks established their own bad banks. They used the same concept both for management reasons and to be able to recover as much as possible. Even if they had to make the valuation mark to market every year, it was still possible to hold on to the assets because of the market problems to which the Deputy referred and also because of the possibility of recovering more for the institutions.

Deputy Kieran O’Donnell

So in terms of the taxpayer, the assets were sold.

Chairman

Excuse me. The Deputy pleaded at the beginning that he had two questions.

Deputy Kieran O’Donnell

It was on the first point.

Chairman

The Deputy may ask this one.

Deputy Kieran O’Donnell

Did the Swedish taxpayer gain much from taking warrants?

Mr. Bo Lundgren

Besides recovering from the bad banks, we merged Gota Bank into Nordbanken. That bank worked quite well which meant that dividends and value increases and partial privatisation has given so much that economies calculate that within absolute terms we regained everything so far. Still the Swedish Government owns 19% of Nordea, which is its name today. There is a value. It was up for privatisation and would have given us a good gain before the crisis but obviously the Government has postponed the privatisation, for some years at least.

Senator John Hanafin

I thank the director general for sharing the wisdom of what happened in the Swedish crisis with the committee. In light of how Sweden managed the difficulties of the early 1990s, how have the banks performed in the recent world downturn? In his presentation under operational strategies Mr. Lundgren mentioned "legislation to limit moral hazard". Will he please explain what he meant by that?

Mr. Bo Lundgren

Domestically, the Swedish banks learned their lessons. Obviously the banks we took over and handled had new management and new boards. They were cautious, they had better systems of risk management but a couple of them missed that point in handling the subsidiaries they acquired in the Baltics. That is why they will have huge losses in the Baltics. Swedbank is establishing a bad bank in Latvia and we are following what is happening there.

On the question on the moral hazard, I read an article a couple of days ago in The Irish Times by Professor Morgan Kelly, since I went through the web to see what the debate was in Ireland. There was one mistake in the article. He said the Swedish bank had only deposits, no bond financing. Of course, Sweden had bond financing as well.

Deputy Joan Burton

Were there guarantees for the bonds?

Mr. Bo Lundgren

Yes. All creditors, except shareholders and perpetuals which are said to be similar to equity. What Professor Morgan said in his article was that bond holders should take responsibility since they have high interest and should be able to take a blow if the bank goes bust, so they have to lose money. That is not feasible. If there is a systemic crisis one has to guarantee all creditors. It is out of the question that anyone should lose. Let us look at Northern Rock where people stood in line, it was the modern time bank run. There may even be Internet bank runs and we had some in Sweden with Lehman as well. I have always proposed that deposit insurance schemes should have 90% compensation because one should take a 10% risk. Over a certain limit, in the British system, one had 90% compensation and obviously that was enough to have many people standing in line waiting to get money out. The experience of Lehman and Northern Rock shows the need to have this guarantee for all creditors. Everyone, including Germany, knows there is an implicit guarantee that is 99% sure but making it explicit gives another percentage and that is a vital percentage. That is a good way of handling the situation.

Obviously bond investors should be able to analyse a bank, think and then invest. The economy will not suffer as much from the problem of moral hazard on the account of the bond holders in a bank compared to what is happening in the real economy. On the other hand I see another moral hazard question, that is, that if shareholders are bailed out and can recover their value later, they can make the same mistakes again because they were bailed out. Management in banks, boards in banks and shareholders must learn the tough lessons. I recall having a 'phone call from an old woman who had been advised to put all her savings in shares of Gota Bank and she lost all her money and I was very sorry for her. On the other hand, I could not do anything about it because shareholding is taking ownership in a market economy. If one cannot cope with the situation, then one loses one’s money — that is market economy. One has to deal with moral hazard in regard to management and shareholders and the owners of the banks. That is why I have been critical of the US way of bailing out those who are shareholders. I cannot understand how Freddie Mac and Fannie May keep private shareholders in those companies.

Our legislation was tough. We could automatically take over a bank if its capital adequacy ratio fell to 2%. We could go to the special court and have decisions taken on capital injections and it gave us strength. Also we sued the two boards of Nordbanken and Gota for compensation in court. As owners we could do that because they broke the internal regulations and allowed credit to be given in spite of regulations stipulating they should do more cautious valuations and so. They had to pay damage. We made a settlement out of court. Since government is so strong we found we could not pursue the case for huge amounts because it was not possible for them to pay. We had a rather tough settlement for them. Also we changed management as a result of what was happening.

Deputy Frank Fahey

Can Mr. Lundgren explain that settlement?

Mr. Bo Lundgren

I do not remember the exact amounts but we sued the board of Nordbanken and Gota Bank. I think we sued for €30 million when it came to Gota Bank and a somewhat lesser amount for Nordbanken.

Deputy Frank Fahey

Was that for excessive lending?

Mr. Bo Lundgren

Not for excessive lending but they broke the internal regulations. They had internal rules in regard to how credit should be handled in the banks and they did not follow these rules. To some extent, they also broke the bank regulation that was in place. As owners one could ask for compensation. To be honest, I was a little surprised that the legal authorities in Sweden did not bring any charges against some of the people in these two banks. That is a bad thing. In Finland there were some court proceedings and some convictions also. We felt one had to shift management. For instance, in First Savings and Loans we did not take over that bank but said that if government goes in there is a need to change management. We were supposed to bring on a new board. My predecessor, the Minister for Fiscal and Financial Affairs, became chairman of First Savings and Loans, as it was called. We did these operations to limit the long-term moral hazard with owners and management.

Deputy Richard Bruton

Like others, I thank Mr. Lundgren for an interesting presentation. Naturally when we ask Mr. Lundgren questions it is with a view to our own situation. One of the crucial issues surfacing now, particularly in light of the IMF report, is whether one goes for nationalisation before a process of creating a bad bank and unwinding the situation. My understanding is that the reluctance here for nationalisation first would be its impact on liquidity. The shock to the system, were we to do as Sweden did and nationalise the banks, would have the potential to create a crisis in liquidity. Therefore, we seem to be settling for an approach that does not involve up-front nationalisation and, unlike the Swedish model, does not have the clean sweep of management. It is a much more constrained model. It requires the pricing of the assets to be absolutely crucial because it is so vital. Perhaps Mr. Lundgren could talk us through his view of the strengths and the pitfalls of full nationalisation. I appreciate he does not wish to speak specifically about the Irish context. One of the arguments against going for a nationalisation approach to make this easier to manage is the fear that it would have an impact on liquidity.

The second issue of interest was that Sweden constituted a court to deal with the potential legal challenges. Many of us looking down the track fear that there may be many legal challenges and that our Constitution which protects the right of property will be cited. I am interested to hear how Sweden set up that court, how it prevented legal challenges and whether any such challenges delayed it in addressing some issues, such as, that once the bank's capital fell below 2% the government could move in. In our courts that Act could potentially be challenged. Was there an issue for Sweden about how it maintained liquidity in the bad banks and how they were kept afloat during that period?

Mr. Lundgren has acknowledged our crisis is deeper than that of Sweden. There is a debate as to whether the taxpayer can save everyone. In its model, Sweden drew the line and provided that everyone, bondholders and depositors, would all be guaranteed and protected. We have not given a guarantee to bondholders unless they are within the dated area. The Swedish model would have extended that guarantee further than we have gone. On reflection, the Swedish model worked at the time but, perhaps, other countries were not in a liquidity crisis as they are now. Sweden could manage its liquidity within a world that was not entirely stressed out. If it was trying to do that now against a background of stressed markets everywhere, what would be the stress points in the Swedish model that might have to be tweaked and can Mr. Lundgren offer any advice to others who are looking at the process in a much more stressed international environment?

Mr. Bo Lundgren

It is difficult. The Bank Support Authority is looking at what might happen in Sweden. I will elaborate. If one does not guarantee bond holders — I can see reasons for not doing it — will that investor invest in banks again? Probably not, it will take some time. They will ask for more security or higher interest to invest. Given the total volume of the problem, Ireland cannot do it. If the losses are so great that it cannot be done, it takes longer to revive the economy. I am in no position to give any advice on that issue but I dare say one has to think about it. If Ireland does not have a blanket guarantee that covers all bond holders then it might have a problem in furnishing the liquidity mentioned, because liquidity is needed not only from central banks and the government communities around the world, it is also needed for the private investor in the long term. It is a difficult question to which I have no answer.

On the issue of bad banks, when we established Securum — which was the big one from Nordbanken — we turned over €6 billion to €7 billion worth of assets and bad loans, right down to €5 billion and gave €2 billion in capital. We capitalised the bank in a way that we thought could be enough for handling the bad loans and taking the losses for ten years at least. We used the mark to market valuation of assets at the time and found a hole in the bad bank and filled that hole to zero. Then it had liquidity. Since we understood we were doing very conservative valuations, obviously there should have been a recovery; we did not believe we would have half of it almost back. There would be some kind of recovery.

When it comes to the right to property we have the same issues. The Swedish constitution is the same so it is a difficult task to handle. Obviously we have to do valuations. If we were to acquire a property and there was a value on that property that we nationalised we have to pay that amount as well. To give an example, when Gota Bank went bust we discovered that all its shares were collateral for a loan from SEB, another bank, to the holding corporation for Gota Bank. SEB discovered that the Government wanted these shares to operate the rescue procedures and so on and SEB said they must have a value. SEB said that if it was to give the shares to the Government, even if everyone knew they were worthless, it would have to pay a price. That was before the legislation was enacted. I spoke to the chairman of the board and said I could not pay anything for something that was worthless. What was decided was that an arbitration board would conduct an evaluation and if there was a value we would pay that value later. The value was zero cost. There were legal proceedings in regard to that valuation later. One cannot just take it, if there is a value.

When we took the Canadian bank that lost the permit to be a bank, there was a discussion as to whether this was legal as the former shareholders wanted to get something back. We have the same old legislation back again, and they have gone to this court which was re-established and asked for another valuation and so on, so there are possibilities to test. If there is a value that shows shareholders should have something back, they will have something back. That is the way Northern Rock was handled also. The valuations should be made without the effect of the Government support.

Deputy Richard Bruton

Was the court specially constituted with its own legal base or was it a normal court?

Mr. Bo Lundgren

No, it was not a normal court, it was a special court, called Prövningsnåmnden, in Swedish. I do not know if the ambassador has a translation, but it is a special court which has three high judges.

Deputy Terence Flanagan

I welcome Mr. Lundgren and thank him for appearing before the committee. In one of his slides, Mr. Lundgren mentioned that seven large banks controlled 90% of the market. Will he explain the level of consolidation that took place in regard to the banks that were wound down in an orderly fashion? What was the timeframe involved and what were the debts of these banks? Perhaps he would expand on the extra regulation that was introduced to control the banking sector in light of what happened? Have any new banks set up in the Swedish market? What is the level of confidence among the banks? Perhaps he will comment on the share price of the banks in the context of mistakes that may have been made at the time. While Sweden has had a 100% recovery of the money injected by the Swedish taxpayer, is there anything specific that he would do differently today?

Mr. Bo Lundgren

The picture of the large and medium-sized banks would give an idea. What happened was that Gota Bank, which was just a black hole and no bank whatsoever, was merged in 1993 into what today is Nordea. Nordea has also merged with one Danish and one Finnish bank so it is a Scandinavian bank. SEB survived and continues operations. Swedbank was formed by the ten biggest savings banks. Initially it did not want to have the First Savings and Loans bank because that was also a black hole. Gota was a small bank and was the hardest hit. Gota lost 37.3% of its total landing over three years, from 1991 to 1993. On average, Swedish banks lost a little less than 20% of their total landing. The most conservative was Handelsbanken which lost 9% of its landing. Swedbank was a merger of ten savings banks. Although we could not do it legally we demanded that Swedbank form a limited partnership so that we got a better structure. It still has owners who are rather weak which is one of the reasons it made the mistakes in the Baltic. It is the one that got most heavily exposed.

The Föreningsbanken, which one could say is the farmers' bank that has connections with farmers throughout Sweden, was too small to go on. It had the same kind of ideology as Swedbank and it merged with Swedbank later after the crisis. Handelsbanken managed by itself, although it used the guarantee.

We did not take any fees for the bank guarantees since the banking crisis was to some extent arose from problems within the banks but the issues of late deregulation, mismanaged government finances and overheating of the economy are a political responsibility and our view was why should we take a fee when there is a shared responsibility for what was happening. I have some views on the European fees as well.

On the new banks, we have four Swedish banks although one could say they are Scandinavian. We had one even smaller bank owned by an old time capitalist. He had never come to us for support. He just took from his real estate empire, put money in and capitalised the bank. He profited by selling it to Danske Bank, which operates here as well. It had been rather successful in Sweden and plays a big role there also. We have Royal Bank of Scotland in Sweden also, although it is not a large player. We have some foreign banks working as well, although not in retail. Danske is doing retail like the other four here.

On share prices, the banks have had ups and downs in that regard. I do not know the current position because I do not follow it to any great extent.

Deputy Terence Flanagan

In regard to nationalising banks, which bank did Sweden nationalise? Was one bank——

Mr. Bo Lundgren

Nordbanken was already 77% owned by government. We took over the 23% that was owned by private investors. That was privatised some years before by the social democratic government. We felt that in order to operate the handling of the bank we needed to have a 100% majority. It made it much easier because of minority protection. We had a public offering to buy back the shares at a rather favourable price because the promises made by the previous government when privatising were rather positive, to put it mildly. Gota Bank was nationalised. I believed SEB and Swedbank would be nationalised but due to the hard rules they managed to find private equity.

Deputy Seán Barrett

Were those retail or investment banks?

Mr. Bo Lundgren

They are retail banks. SEB also has investment banking like Handelsbanken and the others as well, to some extent, but they are all retail banks.

Deputy Richard Bruton

There was no bad bank element to SEB at all.

Mr. Bo Lundgren

Both Swedbank and SEB established bad banks within their operations.

Deputy Richard Bruton

But the government did not recapitalise them in any way.

Mr. Bo Lundgren

We did not recapitalise them. We helped them by saying they could keep the assets for a longer time than was normally the case.

Senator Feargal Quinn

I thank Mr. Lundgren and appreciate his openness and ability to handle that. I accept he does not want to comment on the Irish position but could he have succeeded without nationalisation?

My second question is in response to a point Mr. Lundgren made about moral hazard. He talked about legal proceedings against the managers for breach of regulations and expressed surprise that no decision was taken. Is he talking about criminal proceedings or a criminal offence? He compared what happened in Finland as against what happened in Sweden. Will he expand on his view on that issue?

Deputy Frank Fahey

In answering that question Mr. Lundgren might respond to Deputy Bruton's question on the staging of nationalisation, which he did not deal with.

Mr. Bo Lundgren

What was the last question?

Deputy Richard Bruton

I am asking about Mr. Lundgren's comment on nationalisation. The fear here is that if we went for nationalisation before setting up the bad bank a problem would arise with liquidity.

Mr. Bo Lundgren

In terms of the problem with liquidity for private investors, we are not talking about central banks. We are talking about private investors furnishing liquidity to banks. They do not want to lose money. That is why I said that guarantees must cover bond investors, otherwise they probably will not invest in banks. If banks are nationalised, the government has to furnish liquidity. That is one of the costs if it nationalises. If it does not nationalise and there is a risk, it might have a problem finding liquidity anyway. It is difficult for me to know about the position here. The members will have to do the analysis on the basis of the information that exists here in Ireland. It is very difficult for me to do that.

We could have managed without nationalisation to some extent but we would have had to guarantee Gota Bank's creditors. To let Gota Bank go into uncontrolled liquidation with many losses, not only for shareholders but also for depositors, and we had no deposit insurance at that time, and for bond investors, would have resulted in grave difficulties in getting financing liquidity to other banks as well. We had to handle the position. We could have said we will guarantee it, liquidate the bank and do nothing about it but we would have lost value. If we took over the bank we could see what were the long-term viable parts, what we could put in to Nordbanken and what we could sell. It was easier to nationalise but it was not a necessity to do that. On the other hand, in terms of wanting an upside for the taxpayer in the long run, I am a conservative. I believe in market economy and market economy dictates that if we put in capital we should have the kind of influence and ownership that goes with the capital.

I meant criminal offence in my earlier remarks. We sued for compensation in civil courts but no criminal charges were brought against anyone, which is not desirable. I am aware there were some convictions in Finland. We had a small savings bank in southern Sweden which lost approximately 60% of its lending and a criminal charge was brought against it but the second court said in its decision to acquit it that times were such that the mistakes it made probably were as a result of the spirit of the time. It was a rather peculiar judgment as I saw it.

Senator Feargal Quinn

I will not ask Mr. Lundgren for a comment on Ireland.

Deputy Seán Barrett

They must have learned from you.

Deputy Frank Fahey

Mr. Lundgren's main objective was to maintain liquidity. Our biggest problem, in my view the issue that is causing us the greatest loss of employment, is the refusal of the banks to make money available to businesses. Given that total outstanding Irish credit increased from €160 billion at the beginning of 2003 to €380 billion at the beginning of 2007, an increase of €220 billion in four years, our economy's biggest problem is liquidity. Could Mr. Lundgren give us some advice based on the Swedish model on how it maintained liquidity? We are hopeful that the establishment of NAMA will assist in improving liquidity.

Allied to that, how significant is the fact that the European Central Bank will pay for the bonds that will be paid to the banks for the toxic assets that will be transferred to NAMA? Sweden did not have that, I take it, even though it had a much smaller problem. How significant is that for us?

On the issue of valuation, Mr. Lundgren mentioned market to market valuation. Could he give us some advice on the issue of valuation of the toxic assets that will be transferred to NAMA? There is a widespread view that they should be marked down as low as is necessary. That will have an impact on bank liquidity and so on but could Mr. Lundgren give advice from his experience on what should be the valuation position?

Mr. Lundgren referred to the need for political consensus if possible. How important is that?

Mr. Bo Lundgren

Restoring lending is also a matter of confidence. If one handles the crisis with investors and with management — sometimes new people in management in banks are confident that they have a grip of the situation — it is easier to restore lending. On the other hand, when there are huge credit losses in banks, they tend to be more careful and not only because they have to repair their capital base. There are two ways to meet capital adequacy ratios, one is to get new equity in new capital. If one does not get that, the other way is to shrink the balance sheet regarding the loans one gives. It is necessary to have a capital base restored at least to the amount that is required to have a lending capacity in the economy. It is not so much liquidity but more capital that is needed. Besides the risk of having a credit crunch because the balance sheet is shrunk to maintain the capital adequacy ratio, there is a risk of losing money on new exposures. One cannot decide that small businesses should have loans. It is difficult but the supervision agency in place should monitor and report on the position. In Sweden, the relevant authority is following up on the banks and checking their lending record. If one of the Swedish banks does not lend or has decreased its lending to small businesses, there would be a debate on that and it would lose the support of the public. That is what one can do in such circumstances. One cannot force banks to lend because then one would take over the evaluation of the loans. Therefore, the situation is difficult.

I cannot comment on the buying of assets since Ireland's debt is much larger than ours was and it is difficult to say whether this idea is a good one, a bad one or lies somewhere in between. If one buys assets, one should not buy them at their nominal value. If there is an asset valued at €100,000 one would buy it at a mark down of 50%, 60%, 65% or 70% of its value. If one does a good valuation and has a conservative mark to market valuation, that is the best approach. Then one will have a loss. Perhaps the banks have done write-downs of the value of their assets already and there is a value on their assets sheets. If the valuation of an asset is the same as what one would get on the market, there is no problem, but there is still the problem of the capital base shrinking. If one values an asset higher than what it would realise if sold, one needs to restore capital to ensure the future possibility of lending will not be unaffected by such assets. If one does not do a conservative mark to market valuation of assets, there is a risk on the downside for the taxpayer. If one incurs losses, one should have some kind of compensation or instrument in place for the banks.

Deputy Frank Fahey

Which we have.

Mr. Bo Lundgren

That is what the authorities here should do. Simply buying assets will not solve the problem. A key question is the size of the total combined balance sheet of the banking sector Ireland needs to have the lending capacity it requires for small businesses, households and so on.

Deputy Frank Fahey

That is a critical question for NAMA.

Mr. Bo Lundgren

Yes, but also for others, for Parliament, the Government and the Central Bank. I presume NAMA has instructions to buy assets at as right a price as possible. It would not buy an asset at 100% of its value. If it did, it would have a problem. As to whether it is necessary to restore the capital that is lost, I presume that would be a matter for someone other than NAMA to decide, because I gather it will not give capital injections.

Deputy Frank Fahey

Is it better to write-down values to current agricultural land values for much of the land that is a cause of our toxic debt and then face the possibility of having to pump more equity into the banks to give them the capital base they require?

Mr. Bo Lundgren

It is impossible for me to answer that question.

Deputy Frank Fahey

What would Mr. Lundgren do in such circumstances?

Mr. Bo Lundgren

In the case of Sweden I would have written property values down to agricultural land values. On the other hand, I heard that in the case of Ireland that might lead to so much capital injections that it would be a problem. It is not for me to decide, but in Sweden I would have tried to do the most conservative valuation possible when acquiring assets.

Deputy Frank Fahey

How significant is it for Ireland to have the ECB backing in terms of paying for those——

Mr. Bo Lundgren

That is essential. It is very good for Ireland to have the support of the ECB. It is vital for Ireland.

Deputy Frank Fahey

Even though Sweden had a much smaller debt as a percentage of GDP than we have, surely our ability to pay for these assets with ECB bonds is hugely significant for this economy and will help to lift it much quicker than if we were in Sweden's position in the past and did not have such support?

Mr. Bo Lundgren

Perhaps, but it is difficult for me to answer that question.

Deputy Frank Fahey

Mr. Lundgren might reply to my question regarding political consensus.

Mr. Bo Lundgren

For us, political consensus was a necessity. I had to give a press conference at 8.30 a.m. on 24 September stating that the Government was guaranteeing all creditors in the Swedish banks and that the Social Democratic Opposition was in agreement with and backing this proposal. It took two months before parliament decided on it. The process worked for two months without any parliamentary decision on it and as I had the backing of the Opposition, I had the support of the majority for it. Otherwise, it would have been the subject of considerable discussion. For us, at least, a consensus was vital. It would not be as vital today, as the Government in Sweden has the same legislation in place; we do not have a blanket guarantee in place but the other ingredients are in place. This has been done with the backing of the opposition, even if the transparency in that respect is not what it used to be. For us, political consensus was vital. If one has a majority, it is not that vital, but if the majority is slim, it is vital.

Deputy Seán Barrett

Is Mr. Lundgren saying that had the Swedish Government a majority at that time, he would not have sought consensus from the Opposition in this respect?

Mr. Bo Lundgren

I would have because when it comes to security policy and other matters, we have a tradition and in times of crisis we try to at least have a discussion and see whether it is feasible to have political agreement on such matters.

Deputy Seán Barrett

The level of consultation Mr. Lundgren had was necessary because there was a minority Government.

Mr. Bo Lundgren

Yes.

Deputy Seán Barrett

Ultimately, that proved to be vital in the overall solution to the problem.

Mr. Bo Lundgren

Yes, it proved to be.

Deputy Seán Barrett

In other words, Mr. Lundgren is saying that consultation and openness are important in solving a situation such as this.

Mr. Bo Lundgren

I think so.

Deputy Seán Barrett

Did that lead to the involvement of more political representation on the Bank Support Authority? Was such political involvement influential in deciding there was a need to involve politicians in the operation of organisations such as the Bank Support Authority?

Mr. Bo Lundgren

When we did a case-by-case analysis of the problems, we had support following informal discussions and later we had the support of parliament. We had discussed the package beforehand with the opposition. When we had to deal with the collapse of markets in late September 1992, I asked the economic spokesperson for the Social Democratic Party to meet me and we agreed the formulation of a press notice on it. It took some hours but we outlined the position. We also decided that the Bank Support Authority would have a board, two members of which should be proposed by the Social Democratic Party. I wanted a good chairman to be appointed to the board. While someone else could have been appointed, I knew that a former vice prime minister, who was very respected by people throughout Sweden, could be a spokesperson for what we proposed to do in order to make it as legitimate as possible. I asked this former vice prime minister to be chairman of the Bank Support Authority.

Deputy Seán Barrett

What is the position currently in the Bank Support Authority? Does it still have a vital role in the overall supervisory system in place in Sweden?

Mr. Bo Lundgren

No, the legislation and the Bank Support Authority were abolished in 1996. The authority became the deposit insurance board and that was taken over by the National Debt Office two years ago. So we handled that deposit insurance. We currently have no parliamentarians on our board. The debt office was established in 1789 and was under the control of parliament up to 20 years ago. Parliamentarians were on the board but now we have none and therefore there is no transparency in that respect. I go to the corresponding committee in the Swedish Parliament when they ask me to. If the economic spokesman for the Social Democratic Party, Thomas Östros — who I know well — telephones me for information, I will give what information I can. The Minister for Finance and Mr. Östros have some difficulties in agreeing since they are still political animals, which I am not. They could also have discussions, but we do not have that formal kind of consultation any more.

Deputy Joan Burton

I want to go back into the history of what happened in Sweden as some questions arise from the Irish experience. Mr. Lundgren mentioned that Swedish individuals had become heavily indebted. Did I understand him correctly to say that there were a lot of defaults on mortgages after the banks had gone down? I did not quite understand that. Mr. Lundgren was referring to the changes — that people had debt and in a couple of years they were saving a lot, out of fear obviously, because they were afraid to spend.

In Ireland, the level of personal debt expanded dramatically. Many people now have large mortgages on their house property. In many cases the value of the property has fallen drastically — catastrophically for many individuals — and in many cases people are losing employment. This is not a feature of our crisis yet because Irish people would traditionally continue paying a mortgage for a long time. However, it may happen a year or so down the road as the unemployment crisis here builds up and people lose the capacity to repay their mortgages. Was there any scheme in Sweden to help individuals, or were individuals caught in that kind of trap?

In the build-up to our crisis, bank managers, directors and chief executives got large bonuses for selling debt. The more debt they sold, regardless of the risk, the more money they made both through remuneration bonuses and rises in bank share values. While the chief executives of most of our banks have changed, and in about 60% of cases the chairs of the boards have also changed, there have not been that many changes at senior management level. Since we did not go for a nationalisation model, it is not known if individuals who behaved badly will go.

In Sweden, were there many changes in bank staff at senior executive and board level? If so, did those changes bring in a breath of fresh air? When the bad banks were established, allied to or within the existing banks, were personnel who handled bad debts, bad loans and risky properties changed or were they the same personnel? Does Mr. Lundgren think it is important to have significant personnel changes?

Mr. Lundgren also referred to banks that broke regulations facing civil proceedings, although possibly not criminal proceedings. Did those proceedings result in the banks being fined or censured in some way, thus costing them a monetary penalty that they would have to return to the taxpayers or the Swedish state which bailed them out? I am not clear about that. It might be helpful to go through the trajectory of the Swedish crisis and the changes it brought about in banking culture. Did people pay more attention to regulation afterwards, but then forget about it once things improved?

Going back to Deputy Fahey's question, our banks will not lend now — either because they do not have enough capital and they are trying to get their money back, or because they are too scared to lend. Whether somebody has a good job or a business has a good record, the banks are not moving. Were any mechanisms adopted in Sweden in this respect? If banks suddenly refused to lend to a fairly good company or business that had been there for a long time and had been getting credit heretofore, were any mechanisms employed at the height of the Swedish crisis to deal with that? There is a reference in Mr. Lundgren's paper to a stabilisation fund, but what was that? Did the Swedish Government in any way help firms that could not get credit, even though they could make a case for being a reasonable credit proposition?

Mr. Bo Lundgren

Today the Swedish Government is pre-financing the stabilisation fund for what might come. One can always argue whether that is right or wrong, but it is doing so. Therefore we now have a fund of €1.5 billion in order to finance capital injections. That is money we borrow if we need it, so it is on account; we do not have the money.

We did not have a nationalisation model. It was something that came out of handling a crisis and trying to follow the rules of the market economy which say that if one runs a company where others need to provide capital, then they should have influence as well, according to the capital they inject. That is the reason. Sometimes it became nationalisation, though not as frequently as in the US, but they are somewhat afraid of that word as I understand it.

We did not have any particular problems with households. Even if their houses fell in value, people managed quite well to pay interest and they advertised their loans as well. To be honest, we did not have much of a problem with that.

Deputy Kieran O’Donnell

Did the rate of unemployment increase over that period?

Mr. Bo Lundgren

Yes, of course. It exploded from 2% in the old measurement. Due to the European agreement it would now be 4.5%. It was extremely low in the overheating of the 1980s, and then went up to 12% or 13%. It was even more in the European context. I think 400,000 or 500,000 industrial jobs disappeared, which was extremely problematical. We had, and have, rather high compensation levels in our unemployment system which help people. It provides automatic stabilisers and even if compensation has been lowered in order to encourage people to seek jobs, the compensation levels are still rather high. That means that today, when interest rates are low, even unemployed people in Sweden will be rather well off economically if they have houses.

Although Ireland may have that problem, we did not have the foreclosure system they have in the US. When people can leave a house, obviously the banks have a problem. People in Sweden said, however, that they wanted to keep their homes and they paid the interest. They could put off amortizing for a year or so. Most of them still managed.

We changed the banks' top level management, although we did not go into the banks in detail. If we changed the CEO and management in a bank, they had to see whether others should lose their jobs or shift position, but we did not care about that. We changed boards and senior management. We had some bonus systems, of course, but we also had golden parachutes. I changed the rules in order that the five and six-year periods, with full payment in cash or whatever, relating to the latter would be reduced to a maximum of two years, with payment every month and deductions in respect of whatever other income people might have from their ordinary employment. That is now the rule for listed companies in Sweden.

The difficulty which obtains at present, from the perspective of the financial sector, is that short-sightedness can lead to nasty effects on the priorities of banks, which is not good. In the future, therefore, we must have approved systems. In other words, the systems employed by financial institutions should be approved by the regulator.

There is anger in respect of the payment of huge salaries and bonuses. I agree in that regard. However, I try to explain to people that from the point of view of public finances, corporate taxes are always lower than personal income taxes. If corporations are foolish enough to provide large numbers of bonuses etc., that is bad for the shareholder but good for the public because such bonuses are heavily taxed and state revenues increase as a result. It is not easy to explain that to people but it is true in any event.

On the question of bad banks, we used management personnel from the financial sector. They employed mainly new people. Some people might have transferred from, for example, Nordbanken to the bad bank relating thereto. However, we hired new people and also some consultants.

The members of the boards of the two banks we nationalised were obliged to pay compensation. We arrived at an out-of-court settlement for an amount I judged to be appropriate. As already stated, there is a risk if the Government, which is very strong, goes up against an individual in civil court proceedings. It is similar to David versus Goliath. We decided, when we commenced proceedings, that if a reasonable out-of-court settlement were offered, we would accept it. However, we were also of the view that if people where going to pay, they would do so until it hurt. This demonstrated to others the risks involved. No criminal proceedings were pursued in Sweden.

The regulations were tightened — we tried to do this even during the crisis. Swedish regulation is rather good. Obviously, difficulties arose in the Baltics, which do not have very tight regulations. That is a problem because it is not the banks but rather it is the subsidiaries, which have branches, that were bought by the Swedish banks. Problems existed there even prior to this happening.

As stated earlier, one cannot decide on behalf of the banks that they must lend. It is necessary to establish a calm confidence among people that even though the situation is bad, the Government can handle it. At that point, those in management will begin to behave in a normal way. In addition, the banks must have the required capital base. Due to the fact that Sweden is an exporting country, some of its large corporations, such as Ericsson, etc., finance their operations in the international capital markets. Those markets dried up after what happened to Lehman Brothers and they encountered difficulties in obtaining funding from international banks.

Swedish banks and the financial system in general were obliged to take some of what was not there before. As a result, the capital base of our Government-owned export financing corporation had to be increased. That corporation is doing more of the export financing.

Deputy Joan Burton

Is Mr. Lundgren stating that if a major Swedish multinational had bonds on the international market and could not renew them, the Swedish Government has in place a mechanism designed to provide it with support?

Mr. Bo Lundgren

They have managed better than we thought because when it comes to the Swedish banks, the capital base has not shrunk. In addition, their earning capabilities have been very good. So far, the banks in Sweden have increased their levels of lending and taken some of these credits as well. As a precautionary measure, the Swedish Government gave new capital to this export finance corporation. This means that it can finance even more exports if necessary. We engaged in discussions as to whether it would be appropriate for the Riksbanken, the Swedish Central Bank, to buy corporate bonds directly. At present, it is purchasing these bonds indirectly through the banks. However, the banks do not want them on their balance sheets so there has not been a great deal of financing by way of these corporate bonds. To date, nothing has been done but there are some measures which could be taken. That is one way of handling the matter.

Chairman

We used to have export insurance credit schemes, which are slightly different.

Deputy Seán Barrett

When this crisis occurred, did Mr. Lundgren find that the regulatory authorities had been performing their duties as they should or was there a weakness in that regard?

Mr. Bo Lundgren

Is the Deputy referring to the 1990s?

Deputy Seán Barrett

Yes.

Mr. Bo Lundgren

Yes, obviously. However, that was also, in a way, the Swedish Government's fault. During the years when the bubble was created, the head of Finansinspektionen, the Swedish financial regulatory authority, was a deputy Minister in the Government and was also head of the school authority. He did not, therefore, possess particular knowledge in respect of the financial sector. When I met him I was on the board of a foreign subsidiary — the French bank, BNP Paribas — the only question he asked related to where members of the public could invest their money. The main rule for banks in Sweden at that time was that an institution could be a bank if members of the public were allowed to deposit money with it. That was the only question he asked. He did not inquire about risk management or any other matter. To put it mildly, we had some problems with the regulator at that time and then it was too late.

Chairman

Light-touch regulation has happened all over the world in the past couple of years.

Deputy Seán Barrett

I like that term "light-touch regulation".

Deputy Kieran O’Donnell

Am I correct in stating that the number of large and medium sized banks in Sweden was reduced from seven to four? Mr. Lundgren stated €7 billion of taxpayers' money was invested in the banks. Was there a further outlay of €6.5 billion over the period, leading to an overall total of €13.5 billion? How much of this investment did the Swedish Government recoup from the sale of assets? The Swedish model is being put forward as a blueprint for Ireland. In which banks was the initial €7 billion invested? What was the profile of the customers of, for example, Nordbanken or Gota Bank? Was the business of these banks focused on property lending, retail lending or residential lending?

Mr. Lundgren referred to the bad bank. Did each of the banks in Sweden establish a separate bad bank? Did Nordbanken and Gota establish state-controlled bad banks? What level of write-down applied in respect of the assets transferred to these bad banks? Ireland's property bubble was based on residential rather than commercial development, whereas the opposite applied in respect of the position in Sweden. The recent IMF report on Ireland states that if NAMA is to proceed the Government should consider extending its remit and allowing it to take on not just property-related loans but also residential loans.

What was the overall view taken in Sweden in respect of the economy during the crisis in the 1990s? As Mr. Lundgren stated, €7 billion was invested in the Swedish banks. The Irish Government has already invested €11 billion in the three main banks here. Some €3.5 billion was invested in both the Bank of Ireland and Allied Irish Bank and a further €4 billion was invested in Anglo Irish Bank. We have, therefore, invested much more than Sweden in our banks and this has happened even before the establishment of NAMA. This places the matter in context. I accept that I have asked Mr. Lundgren to provide a great deal of information. It would just provide an understanding of exactly how the Swedish model worked.

Mr. Bo Lundgren

I will try to do as well as I can. First, Ireland's problems are greater than ours, to put it mildly.

Deputy Kieran O’Donnell

Yes, that is an understatement.

Mr. Bo Lundgren

Second, if one compares the Irish crisis with the Swedish crisis in the 1990s, the savings and loans crisis, and America in 1932 and 1933, there are still ingredients one has to consider and challenges one has to meet. I always say that one cannot learn anything from any model if one does not put it into the current context.

Deputy Kieran O’Donnell

That is the reason for my question.

Mr. Bo Lundgren

Our exposure was €7 billion, our outlays were €6.5 billion.

Deputy Kieran O’Donnell

Is that the amount that was given?

Mr. Bo Lundgren

Yes, that was the amount we gave to the banks. Of that, approximately €4 billion went to Nordbanken and the rest, except for a small amount that was a subsidy for FörstaSparbanken and the small savings and loans, went to Gota.

Deputy Kieran O’Donnell

Was that €2 billion?

Mr. Bo Lundgren

Approximately. We built the bad banks for those two banks. The total in outlays of €4 billion and €2.5 billion in direct payment was the total for the bad bank and the good bank.

Deputy Kieran O’Donnell

Were the bad banks established from Nordea and Gota?

Mr. Bo Lundgren

Yes. Then they were separated so we owned the Securum and Retriva directly from government so they were not under Nordbanken and Gota. We separated them.

Deputy Kieran O’Donnell

Were the two bad banks state owned?

Mr. Bo Lundgren

Yes. We did not interfere in the handling. We hired people from the financial sector. I had one person on board. They could manage as best they could. We had informal contacts. It was 80% real estate, of which 95% or more than that was commercial.

Deputy Kieran O’Donnell

There is very little residential.

Mr. Bo Lundgren

Yes, we believed that like the Savings and Loan in the US we would have a second wave of residential problems coming to us but we did not get that.

Deputy Kieran O’Donnell

Sweden already had its tsunami.

Mr. Bo Lundgren

Many people said we should squeeze the economy, repay the loans and handle them but then we reduced our consumption, which was bad for the economy as well. The economy suffered from that but not through the banks, as is happening in the US today for instance, and perhaps in Ireland as well.

Deputy Kieran O’Donnell

What did the taxpayer recover from the sum of €6.5 billion that went into the two bad banks?

Mr. Bo Lundgren

Approximately €3 billion.

Deputy Kieran O’Donnell

There was a loss of approximately €3.5 billion.

Mr. Bo Lundgren

Yes. One can always argue, which some economists have, whether one should take into consideration later on that we received dividends from Nordea and the other part privatisations. On the other hand, with Nordbanken not having any losses there was an alternative scenario. The crisis cost taxpayers money.

Chairman

Were banks required to pay interest on the injection of capital?

Mr. Bo Lundgren

No, since we owned the banks there was no reason to do so.

Chairman

They were all nationalised.

Deputy Kieran O’Donnell

It was in the form of shareholding.

Mr. Bo Lundgren

Yes, we had a percentage of the shares.

Deputy Kieran O’Donnell

In the two bad banks.

Mr. Bo Lundgren

In the two bad banks and in the two good banks. Gota was then transferred into Nordea, so we owned Nordea and the two bad banks.

Deputy Kieran O’Donnell

Did the other banks, including SEB, have bad banks?

Mr. Bo Lundgren

Yes, they formed bad banks within the existing banks. They owned them. I do not know whether they had a holding corporation and then a good bank and a bad bank but they were owned by the same shareholders that owned SEB.

Deputy Kieran O’Donnell

Did the government put any money into them?

Mr. Bo Lundgren

No.

Deputy Kieran O’Donnell

Was it only a case of giving a guarantee?

Mr. Bo Lundgren

A blanket guarantee was given and after negotiations and a turnaround in the economy they managed to raise private equity. Due to the hard conditions they did not want government money.

Deputy Kieran O’Donnell

What were the average write-downs or valuations in terms of the loans that went into the bad banks?

Mr. Bo Lundgren

There were write-downs at different stages. Nordbanken started making write-downs when the value of collateral went down. In general, the collateral for those bad loans decreased in value by 40% to 50%. That was the accumulated loss.

Deputy Kieran O’Donnell

In the end, were the write-downs of the order of 40% to 50% in respect of those assets?

Mr. Bo Lundgren

Yes, the Deputy could say that.

Deputy Kieran O’Donnell

Mr. Lundgren stated that Sweden was very much export driven and that there was a devaluation in 1992. In terms of the Swedish economy coming out of the property bubble, what were the main ingredients in achieving that?

Mr. Bo Lundgren

Due to handling the crisis we avoided the credit crunch. I asked the business organisations to give examples of small businesses and others. That is one reason.

Deputy Kieran O’Donnell

Was there no credit crunch?

Mr. Bo Lundgren

I said we had minimal credit crunch.

Deputy Kieran O’Donnell

Unlike in this country.

Mr. Bo Lundgren

Alan Greenspan was interested in what happened in the mid-1990s. I spoke to him and my deputy, who was governor of the central bank had good contacts with Alan Greenspan. They concluded that one of the reasons for the fast recovery of the economy was tackling the financial system and getting it in order quickly so one had a lending capacity once again. Stimulus packages or in our case automatic stabilisers together with exports going somewhat better in 1993 and 1994 made the recovery come more quickly.

Deputy Kieran O’Donnell

What was the timeframe between deciding to establish the bad banks and the bad assets being transferred from Nordea, Gota and the other banks into the bad banks?

Mr. Bo Lundgren

That took six or seven months. To give an example in Nordbanken, apart from some businesses, the real estate that was transferred to Securum was 2,500 properties.

Deputy Joan Burton

Were they all commercial properties?

Deputy Kieran O’Donnell

As distinct from residential?

Mr. Bo Lundgren

Yes.

Deputy Kieran O’Donnell

Am I correct to say that Sweden's crisis was a commercial crisis, as distinct from a residential crisis?

Mr. Bo Lundgren

Yes.

Deputy Kieran O’Donnell

In the Irish situation the pendulum is swinging very much towards a residential crisis.

Chairman

No, it is not.

Deputy Kieran O’Donnell

Some of it.

Deputy Joan Burton

Our biggest problem is development land.

Deputy Kieran O’Donnell

Much of that is residential.

Mr. Bo Lundgren

There was some land as well. A total of 80% was real estate, mainly commercial and 20% was medium-sized business. We had one English company Bricom, for instance, which Nordea had heavily financed. We sold it rather quickly since it did more aggressive things as well as defence. Someone told me it also educated legal soldiers for Africa, which was not a good thing for government to own.

Deputy Frank Fahey

What significance does Mr. Lundgren attach to the fact that 30% of the total Irish assets are outside the country?

Mr. Bo Lundgren

Obviously it is more difficult to value the assets and one has to do a valuation as quickly as possible.

Deputy Frank Fahey

In terms of recovery, let us say that significant amounts of the Irish banking liabilities are in Great Britain, the United States and Europe. Surely that must be a good thing for us in terms of the recovery of those asset values in the future?

Mr. Bo Lundgren

Hopefully. If they recover before Ireland and other countries in a recovery cycle then that is better. Of the commercial real estate approximately one fifth was abroad, mainly in Britain. There were five public offerings. An effort was made to put commercial real estate that fitted together. There was one public offering in London and the other four in Sweden. I do not remember exactly because Securum is the one I followed most closely.

Deputy Kieran O’Donnell

Did residential property fall in price over the period between 1992 and 1996?

Mr. Bo Lundgren

Yes, it fell in price.

Deputy Kieran O’Donnell

By much?

Mr. Bo Lundgren

In real terms it was approximately 20%. Condominiums in central Stockholm did fall more and also in some of the most attractive areas around Stockholm it was perhaps 30% or 35%.

Deputy Kieran O’Donnell

Would commercial property have fallen by more?

Mr. Bo Lundgren

Yes, especially in city centres such as Gothenburg and Stockholm it was on average 50%. One of the actions we took to try to stem the fall in property prices was, as I said, to abolish property tax on commercial real estate.

Deputy Kieran O’Donnell

Was that effective?

Mr. Bo Lundgren

It was somewhat successful in helping to reduce the fall in prices.

Deputy Kieran O’Donnell

How far into the cycle was that done?

Mr. Bo Lundgren

It was done in the spring of 1992, before the stimulus package was introduced.

Senator John Hanafin

I note that the scale of the difficulty was identified in August to September 1991. However, Mr. Lundgren has referred to September 1993 as the beginning of the end. In other words, we seem to be talking about a relatively short timeframe. The European Central Bank interest rate is currently 1%. What interest rates were in place in Sweden in the years 1991 to 1993? Were the authorities in a position to reduce the rates? Is Mr. Lundgren of the view that the 1% rate will help Ireland to recover quickly?

Mr. Bo Lundgren

Interest rates internationally and in Ireland will undoubtedly assist a recovery. In the book I wrote about the financial crisis in Sweden, which was published ten years ago, I referred to a perverted monetary policy. After our problems emerged, we were not able to keep our currency pegged. We had a marginal rate at that time, in the midst of a depression in the Swedish economy, which gave us a real interest rate with expected inflation of 7.5%. If one must keep interest rates up in order to defend the currency peg, as Denmark is doing today, that is one thing, but if one loses the peg and still persists in maintaining high interest rates, then that is a perverted monetary policy. Sweden suffered a prolonged crisis as a result of the monetary policy in place at that time. As I recall, after Britain had begun to ease monetary policy, which achieved a good result, the governor of the Swedish Central Bank said he would never do it the British way.

We had some problems with interest rates. It is a long story but they came down gradually during 1994 and 1995. We had some problems that led to an increase in rates at different points, but since inflation reduced rapidly and we did not suffer the imported inflation we expected, we could maintain rather low interest rates from 1995 or 1996 onwards. Inflation was kept below 2% at that time.

Deputy Frank Fahey

Does Mr. Lundgren see any light at the end of the tunnel for Ireland?

Mr. Bo Lundgren

Yes, financial crises are always overcome.

Deputy Frank Fahey

Should we be confident, given the advantages to which Mr. Lundgren referred?

Mr. Bo Lundgren

It is useful to compare the current situation with what was done in the past. In general, central banks and ministers for finance in 1932 and 1933 took mostly the wrong actions. Today, governments and central banks are mostly taking the right actions. One can argue about this and that technique — and it is good to have that type of debate — but most countries are dealing with their problems. Our Nordic friends in Iceland are facing even graver problems than Ireland. It is unfair to make the joke that the only difference between the two countries is the letters "c" and "r". The situations are not comparable.

Deputy Joan Burton

Would Mr. Lundgren say that our membership of the eurozone was the critical difference between us and Iceland?

Mr. Bo Lundgren

I cannot evaluate the degree of influence but Ireland's membership of the eurozone has clearly been of great importance. It is much more difficult to cope with this type of crisis when one has one's own currency. Sweden had a national debt last year of 35% of GDP, which is expected to increase to 40% or 41% by the end of 2011. Our current account surplus, which was 7% of GDP last year, is expected to reduce slightly but to remain positive. We have no problems with our banking sector in that we can afford to capitalise it if that becomes necessary.

In respect of our currency, we pay a premium because we are not often on the euro and dollar markets. We are 80 base points over Germany, but still our currency has depreciated by 20% to 25%. We do not make the market shares we did. In 1992, when we lost the currency peg, we had a cost problem. The other issue was that the global economy was picking up. Today, even if the Swedish currency is weaker, it takes time to get more market share. There is also the inflation effect. We survived the inflation effect in the early 1990s, fortunately, but are unlikely to do so this time. There is a structural problem within the Swedish economy whereby management, observing that the currency is going down, decides that we do not need structural reforms and do not need to increase productivity. We have taken a huge bet on the Swedish currency strengthening, which I am confident it will. However, if it does not, we will have significant long-term problems in the Swedish economy. At the time of the Swedish crisis, the then Prime Minister and I were in favour of a referendum on joining the eurozone. The problem with referenda — as the Irish Government will be aware, as I understand — is that the electorate may use them to punish the government for an unrelated matter. Membership of the eurozone is a great advantage for Ireland when compared with the situation of Iceland.

Deputy Kieran O’Donnell

I understand Mr. Lundgren oversaw a situation where the three main Swedish banks effectively established bad banks within themselves.

Mr. Bo Lundgren

Yes.

Deputy Kieran O’Donnell

Did the Swedish Government give any consideration to setting up a NAMA-type body to take over the bad loans of all the banks, as proposed by our Government? Was there a reason such a structure was not established and that the banks were instead left intact? Did the decision to leave the bad loans with the banks lead to a more efficient recovery?

Mr. Bo Lundgren

We saw that the banks were able to find private equity to capitalise themselves and that the total lending capacity in the Swedish banking system was therefore adequate. If one or more of the banks had sufficient equity to meet the legal requirement but still required more capital in order to engage in lending, we might then have decided to provide more Government capital. However, we found that the banks managed to achieve the capital base required both for them and for the Swedish economy. Therefore, we never considered purchasing assets from them. Even if their capital base had been too small, I would have preferred capital injection to the purchase of assets.

Deputy Kieran O’Donnell

Will Mr. Lundgren explain that preference?

Mr. Bo Lundgren

The disadvantages of the purchase of assets are the valuation problem and the risk for the taxpayer. There is less exposure for the taxpayer if capital is injected and there is corresponding ownership of the bank, even if it is only 20% ownership.

Deputy Kieran O’Donnell

Is Mr. Lundgren saying he is in favour of effectively managing the banks themselves as distinct from taking over their bad debts by way of a consolidation process across the entire banking system?

Mr. Bo Lundgren

I would not manage the banks; that is a matter for the management. Perhaps I would demand a change of personnel if there were a problem of management. Should we need in future to inject a substantial amount of capital into one of our banks, I would prefer, if necessary, that there be a change of board, chairman and so on.

Deputy Kieran O’Donnell

Where there is a choice between purchasing bad loans from banks and consolidating them into an asset recovery agency or instead putting capital into the banks themselves what, in Mr. Lundgren's experience, is the best model? That is the fundamental issue.

Mr. Bo Lundgren

From the Swedish perspective, I prefer the option of capital injections.

Deputy Kieran O’Donnell

Will Mr. Lundgren expand on that and set out the bottom line in terms of his preference?

Mr. Bo Lundgren

Buying assets presents a valuation problem. If one wants to keep the potential risk for the taxpayer down, one should try to avoid it. If one bought assets, one might enter into a situation in which one would need to combine them through capital injection, since one is buying assets with a haircut. It would be more troublesome.

However, if Ireland and other countries have aspects that Germany, for example, does not and buying assets would be easier, perhaps that is what should be done, but I would choose another way. Should a Swedish bank have a problem, the Swedish Government's priority is to use a capital injection with equity and take the pursuant majority or minority ownership.

Deputy Kieran O’Donnell

Does Mr. Lundgren believe that would put the Swedish taxpayer at less risk?

Mr. Bo Lundgren

That is how I see it. There could be other problems, but arguing them would be impossible at this point.

Deputy Seán Barrett

Sweden has a tradition of individuals placing large deposits in banks. Is it a trend that people deposit their money in banks?

Mr. Bo Lundgren

It is amazing that many people have instead been investing in different funds. The large fees are a problem for them, but not many keep their money in deposits any more. There has been a shift to stock.

Chairman

Are there any other questions? If not, I thank Mr. Lundgren on behalf of the committee for taking the time to attend and answer a myriad of questions on many areas. He has given us an insight into what problems he needed to face. As there was no need to re-invent the wheel, we have put some of the measures used in the course of events as explained by Mr. Lundgren into operation in Ireland. For example, phase 2 in September 1992 saw a bank guarantee, whereas everything started in October 1991 or prior. We made our bank guarantee early. Some of our colleagues in other countries were not happy with our course of action, but followed it. The Swedes did it in 1992.

Every country is facing a different situation and must take different actions. Mr. Lundgren's explanation has been of benefit to the committee. Many of the actions set the example being followed by our Government. Hopefully, the beginning of the end of our problems will occur at an earlier date than predicted by many of the commentators, who have since left us. As Mr. Lundgren stated, working together across all parties is the way to advance. Since 1987, it has been a successful approach for Ireland. In due course, it will make our economy successful again.

I thank Mr. Lundgren for giving of his experiences and wish the Swedish economy success. As part of the same family, it is important for us to have Sweden operating well. Since we are an exporting nation, we need more markets and look forward to increasing our sales into Sweden.

Mr. Bo Lundgren

I thank the Chairman. Let us hope for the best.

Chairman

We will adjourn for five or ten minutes, after which time we will go through some items.

The joint committee went into private session at 11.55 a.m. and adjourned at 12.15 p.m. until 2 p.m. on Wednesday, 15 July 2009.