JAMIE SMYTH talks to Bo Lundgren, the director general of Sweden's national debt agency who helped to solve his country's banking crisis

THE GOVERNMENT risks subsidising shareholders in the banks at the expense of taxpayers by choosing not to nationalise banks. It also faces a major challenge in valuing the bad loans it plans to buy from the banks, warns the man who helped solve Sweden’s banking crisis in the early 1990s.

Bo Lundgren, who is director general of Sweden’s national debt agency, masterminded Sweden’s response to the bursting of a huge property bubble in 1990/91 that threatened six of the country’s seven biggest banks with bankruptcy.

As minister for fiscal and financial affairs between 1991 and 1994, he designed a general government guarantee for all creditors and depositors at the banks. He followed this up with policies to recapitalise, nationalise and liquidate banks that were not viable. Part of the strategy identified by Mr Lundgren was the formation of two bad banks to purchase the bad assets in the worst affected two private banks Gota and Nordbanken, which were nationalised. Within five years, the bad bank was wound up and Nordbanken was privatised to become Nordea. Despite ploughing 65 billion kronar (€6.1 billion) into the banking system to support the bad bank plan, the eventual net cost to taxpayers was nil.

Parts of this plan sound eerily familiar: so is there hope of a quick and cost-free Irish recovery?

“It’s more difficult now. Ours was a regional crisis and we benefited from a turnaround in the global economy. We also devalued our currency,” says Mr Lundgren, who nevertheless suggests that the Government still has to follow many of the same steps Sweden took in the 1990s to bring about recovery.

“You have to maintain liquidity. Secondly you have to restore confidence: one way we did this was through the blanket guarantee that Ireland has also implemented now. The US didn’t mange this last autumn with Lehman – and the third thing you have to do is to restore the capital base. If private investors aren’t willing to go in, then the Government has to do it,” he says.

But Mr Lundgren, who admits he doesn’t know the details of the Government’s strategy, warns nationalisation of banks should be considered.

“I find it very difficult from a market economy perspective to say: we’ll go in with capital but please you will still own the bank and profit from what we are doing.

“If you don’t nationalise the banks, then you subsidise the present shareholders and that is a difficult thing if you want to get acceptance of the people. We were on the verge of nationalising six of the seven largest banks,” he says.

When asked about the reluctance of the Government to nationalise the biggest banks, he warns of the danger of moral hazard if shareholders are protected against the interests of taxpayers.

“If someone owns a company that fails and someone else has to go in and rescue the company then there should be a transfer of ownership,” says Mr Lundgren, who adds Swedish authorities sued bankers for breaking their own rules on offering credit.

“These were personal suits and they paid considerable sums in compensation. They also had to declare they were responsible for what happened,” he says.

Political consensus is also important to build confidence and enable the strategy to work. “It would be much better in Ireland if the two main parties could agree on handling the banking crisis. It would also be better accepted by the electorate,” says Mr Lundgren, who notes one of the big problems in the US is a lack of leadership in Congress on how to tackle the banking crisis.

At a recent appearance before a congressional oversight panel on the banking crisis, Mr Lundgren identified a key difficulty in any “bad bank” strategy – accurately valuing the “bad assets” to be bought by governments.

“We were very strict. When you have non-performing loans, you have to do mark to market valuation. We had a lot of state experts that formed the evaluation board and they made valuations from market prices that were available.

“Otherwise they tried to get it from capitalising on the yield you get from the real estate and comparing that with other parts of Sweden,” says Mr Lundgren, who warns if you pay too much for the loans, the taxpayer loses.

Asked about the cause of the crisis in Ireland, Mr Lundgren says it goes beyond the global economic and financial crisis.

“I have wondered for several years when the overheating in the Irish economy would come to a halt. Obviously, the fiscal policy should have been used if monetary policy couldn’t cool off the economy. Obviously there were political mistakes made, to put it mildly,” he says.

“But I do hope with all my heart that the Government’s recovery plan will be successful.”