The Nordic Experience of Financial Liberalization
Edited by Lars Jonoug, Jaakko Kiander and Pentti Vartia
Chapter 3: Financial Crisis in Finland and Sweden: Similar But Not Quite the Same
Peter Englund and Vesa Vihriälä INTRODUCTION1 In both Finland and Sweden, the general macroeconomic depression in the early 1990s was associated with a deep financial crisis, involving a currency crisis, a banking crisis, and widespread debt service difficulties in the non-financial sector. These episodes have much in common with the financial crises experienced in several developing countries in the recent past. In particular, they were preceded by financial liberalization and a credit boom. In the case of developing countries, inadequate institutions have often been blamed for what happened. ‘Crony capitalism’, corruption, bad statistics, and the expectation of international rescue operations have been cited as important factors leading to an unsustainable boom and a later collapse. In the Nordic countries such institutional weaknesses are less likely explanations. These countries are among the most highly developed and least corrupt countries in the world. Nevertheless, the boom-and-bust experiences seem very similar to those of many developing countries, suggesting that other factors must have been important. Macroeconomic policies constitute one set of candidates; in particular, both Finland and Sweden unsuccessfully tried to stick to a pegged but adjustable exchange rate regime just as so many developing countries have done. Similarly, despite generally highly developed institutions, the financial and regulatory systems were ill-prepared to cope with the forces that were unleashed by financial liberalization. Once the crises hit, the authorities intervened heavily. Failing banks were kept alive through massive public support, and far-reaching guarantees of bank liabilities were issued. In spite of this, there...
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