Japan and Sweden: A tale of 2 gov't bailouts

Loans turn sour after years of excessive lending. Big financial institutions collapse. Fears grow about an economic meltdown. The government announces a massive bailout.

The story of the current U.S. financial crisis is in many ways similar to what happened in Sweden and Japan in the 1990s. In both cases, the governments intervened — with very different results.

A look at the financial crises abroad:

SWEDEN

THE PROBLEM: Sweden plunged into crisis after a frenzy of risky lending into an overheated real estate market, spurred by deregulation in the mid-1980s. When the bubble burst in 1991, the effects reverberated throughout the economy. According to Statistics Sweden, the country's gross domestic product fell as much as 4.4 percent between 1991 and 1993, nearly 60,000 companies filed for bankruptcy and housing prices plunged 19 percent.

ACTION: Sweden spent billions on blanket guarantees for creditors and depositors. It also bought two failing banks, Nordbanken and Gota Bank, and set up a special asset management company to assume bad loans and the collateral behind them. The measures cost the government an estimated 65 billion kronor, or roughly around $10 billion at the time.

RESOLUTION: Much of the government's costs were recouped when the assets were sold. The government still owns nearly 20 percent of Nordea Bank AB, the successor to Nordbanken — a stake that is now up for sale, worth around 45.3 billion kronor ($6.9 billion) at the current share price.

LESSON FOR U.S.: The Swedish government acted quickly and decisively. It also took over institutions and companies. Bipartisan cooperation was another foundation: The center-right government and the leftist opposition joined forces to stem the crisis. That, along with transparency, was key to winning public support.

JAPAN

THE PROBLEM: Japanese financial institutions bet that real estate prices would continue to rise in the 1990s. Reality hit when the inflated value of assets plunged, and borrowers were unable to repay loans. Money became more difficult and expensive to obtain. In 1997, Sanyo Securities Co. and Hokkaido Takushoku Bank went bankrupt. Then Yamaichi Securities Co., a "Big Four" brokerage, also collapsed, stunning the nation. Delayed action and the lack of transparency in Japan's financial system exacerbated the problem as many financial institutions hid the bad debts.

ACTION: Banks started writing off their bad debts in the mid-1990s. The Japanese bailout began in earnest in 1999 when the government set up a special organization, the Resolution and Collection Corp., to handle the disposal of nonperforming loans. The net public outlay to clean up the bad debt mess was 18 trillion yen ($168 billion), according to the Financial Services Agency.

RESOLUTION: The Japanese government recouped a sizable amount of its bailout funds by reselling collateral, most often land, and other assets. The abysmal times in Japan during the 1990s are now known as the "lost decade." Even though the economy is better now, the Japan's stock market still hasn't returned to its peak before the bubble burst. And Japan still has about $9 billion worth of property held as collateral that needs to be sold.

LESSON FOR U.S.: Japan waited too long before resorting to a bailout using taxpayers' money to write off the mountain of bad loans on banks' balance sheets, experts say.

Back To Top

What $700B won't buy: a quick fix for the economy

Associated Press

Sat Sep 27

2