Beware of Swedes bearing lecture notes. So might be the watchword of Hakuo Yanagisawa, Japan's minister of financial services and a vigorous opponent of government intervention to solve his nation's banking crisis.
Tokyo's bureaucrats may have ramped the Japanese stock market with stunning success over the past month, and for this let us tip our caps. But as many a banking analyst has already pointed out, they have not averted a crisis in the banking sector. They have merely deferred the day of reckoning. The most likely way out of it remains public intervention, however little Yanagisawa-san and his colleagues wish to discuss it just now.
Let us tip our caps, then, to Bo Lundgren, for his timing could not be better. The current leader of Sweden's parliamentary opposition and a former minister for fiscal and financial affairs arrived in Tokyo in late February, just as the froth was rising in the share market, to tell the Japanese about the banking crisis he helped resolve a decade ago -- by way of public intervention.
I don't know whether Yanagisawa or anyone else in Prime Minister Junichiro Koizumi's government heard or has read Lundgren's speech. But I'd wager they've weighed its substance carefully, given its striking relevance to Japan's predicament.
The speech is available through the Swedish Embassy in Tokyo; my copy came, with an astute commentary, via J. Brian Waterhouse, the Tokyo banking analyst at HSBC Securities.
Lundgren was a central figure in resolving the banking crisis that hit Sweden in the early 1990s. Sluggish and given to denial, the Japanese have already let pass some of his lessons -- be swift, be accountable. Nonetheless, as a blueprint from which to borrow, the Swedish solution as Lundgren outlines it offers the Japanese a chance to learn from the best kind of experience -- experience painfully acquired.
Sweden's crisis was not nearly as big as Japan's: troubled loans were 20 percent of outstanding credit, 12 percent of gross domestic product, compared with (by estimates other than those officially advanced in Tokyo) 20 to 25 percent of credit outstanding and not quite half of GDP.
But the similarities are many. Swedish banks got into trouble when a speculative bubble that inflated during the second half of the 1980s lost its air. Then property prices collapsed. The markets crashed, overexposed banks headed toward the wall, and the economy was imperiled.
Given that all this began in 1990, just as Japan's bubble started deflating, the divergence in responses in Stockholm and Tokyo adds piquancy to Lundgren's account.
Sweden took less than a year to commit itself to a solution once crisis conditions were identified in October 1991. Enabling legislation was in place six months after that. The Bank Support Authority, the politically independent body set up to manage the crisis, was an artifact of history by 1997. Six years, start to finish, and clean as a Nordic household.
It went like this. In the beginning was the word and the word was transparency. "A very important principle for the work was to be very open when accounting for the situation in the financial sector and in banks applying for support," Lundgren says. "This was essential to gain sufficient confidence from the outside world in a wide sense -- not least popular legitimacy." While the amount of capital required was unclear, an incorrect assessment carried the risk of damaged confidence: Too large a commitment, Lundgren says, "might be taken to imply that the banks were in much greater difficulty than had been acknowledged." Too small, and the agency would have had to go back for more money, "which could be seen as implying that the situation had not been under control." This latter is exactly the result Yanagisawa-san got in 1999, when he committed insufficient funds -- ?7.5 trillion, about US$57 billion -- to a bailout. In the end, Stockholm simply made an open-ended commitment to saving the nation's banks however much it took.