Bank repairs may take 'year or two'

 

THE SWEDISH minister for financial affairs during the country’s banking crisis in the early 1990s has said he would not have considered buying toxic assets from private banks due to the potential risk to taxpayers.

Bo Lundgren, head of the Swedish National Debt Agency, who helped solve the country’s banking crisis between 1991 and 1994, told The Irish Times that governments could afford to make mistakes valuing toxic assets if they nationalised a bank because they owned the lender.

“For me, it does not sound like the right solution to buy assets from private banks. If you should lose out on that, then the taxpayer should have some kind of other benefit.”

He said it was easier to nationalise the banks to price toxic assets but it was “not a necessity”.

Mr Lundgren met Minister for Finance Brian Lenihan and officials from the National Treasury Management Agency yesterday.

Mr Lundgren spearheaded the rescue of the Swedish banking sector after the bursting of a property bubble in 1990-91 brought six of the country’s seven largest banks to the brink of collapse.

Sweden nationalised two banks, Nordbanken (later Nordea) and Gota, and created two “bad banks” using their toxic assets.

Gota was later liquidated and its assets moved to Securum, the bad bank created out of Nordbanken.

Mr Lundgren said the Swedish government invested €6.5 billion in capital into the two banks.

He said the bailout costs were recovered from the sale of assets, the privatisation of Nordbanken (Nordea), in which the government still owns 19 per cent, and dividends paid to the state by Nordea.

Speaking at the Oireachtas Joint Committee on Finance and the Public Service, Mr Lundgren said: “Your problems are greater than ours, to put it mildly.”

He said it would take “a year or two” to repair the Irish banks and there would be “costs to handle”.

“You should handle bad assets as long as it takes to recover the value,” he said.

Mr Lundgren, who was also speaking at the Institute of International and European Affairs in Dublin, said the total balance sheet of the Swedish banking sector amounted to 120 per cent of GDP. This compares with 300 per cent of GDP for the Irish banks.

He said 80 per cent of the Swedish toxic assets related primarily to commercial property. Toxic bank assets were written down by between 40 and 50 per cent of their value.

He said he would reduce Irish land banks to agriculture values but this might require large capital injections into the banks.

Mr Lundgren favours the more severe mark-to-market writedown of assets rather than a “through the cycle” valuation to avoid a scenario similar to the Japanese crisis where recovery took 15 years.

“If you’re doing this kind of asset buying with a downside risk for the taxpayer, that risk is minimised if you do a very conservative valuation.”

He said the Sweden’s banking rescue was unpopular and his party was voted out in 1994.

“You need to be prepared to lose an election.”

Mr Lundgren said the government sued the boards of Nordbanken and Gota for breaking credit rules, but did not pursue criminal actions. The directors settled out of court.

Nordbanken’s directors paid over €3 million.