Swedish crisis (2017)Resumen Inglés
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Swedish banking crisis
First of all we were in a situation in which the currency was pegged to a certain standard in the EU so
there was an intrinsic need of adjusting appreciation and depreciations by using interest rate tool.
Also the high level of inflation signalized that Swedish currency had need of higher interest rates, but politicians were not interested in constraining the growth so there was a lack of effective restrictive monetary and fiscal policies but...
When the chaos began, then all alarms started ringing and interest rate tool was underestimated to calm the effect of the disparity of the real and the nominal exchange rate of Swedish krona. So the overnight one went up to 500% on the Black Wednesday and ERM system failed! It was crucial to maintain stable the krona so LM curve was adjusted in order to minimize the impact of the crisis, but the main decision of asking for a certain increase in the reserve requirement collapsed the Monetary supply and the domino effect produced a huge maladjustment in their currency’s health.
So that September (with the bankruptcy of Gota Swedish bank) almost all big non-future-Euromembers left the ERM and that November 1992 the Swedish krona went into the floating market with an immediate depreciation of 9% up to 20% at the end of the year.
These interest rates and the exchange rate aggravate the financial crisis and loans, banks’ losses were just going worse up to an estimation of a cost over 5% of GDP.
The costs were assumed by the taxpayers because of before the crisis there were a lot of negative NPV projects which were carried out and crisis left banks poorly capitalized and bank lending decreased by 21% in current prices and the margin between the money market rate and the average bank lending rate reached a high of more than 5% in 1992. So, in several respects the effects of the crisis on the banking sector appear to have been short-lived.
Deregulation probably only played a minor part in triggering the general macroeconomic boom in the late 1980s. Overly expansionary fiscal policy, a monetary policy that was constrained by the fixed exchange rate, and a tax system that transmitted constant pre-tax real interest rates into falling post-tax interest rates in an environment of increasing inflation. One should stress that deregulation stimulated competition between different financial institutions, where the upside potential from rapid expansion was given too much weight relative to the long-term risks. For one thing, the banks did not have information systems capable of handling the new situation with rapidly expanding credit portfolios. Also, the rate of expansion and the apparent profitability of new lending created a difficult problem in allocating scarce human resources Finally, it is conceivable that banks and finance companies close to insolvency realized that pay-offs were asymmetric and gave incentives for increased risk-taking. The commitment to a fixed rate proved very costly in the end. First-best would have been to have implemented it earlier, and second-best might have been to have postponed it for some time.