To understand the handling of a crisis, it is useful to know which factors generated the problems. Hence, my narrative will include the events that led up to the crisis in Sweden. I will also comment on the developments in Asia, with some emphasis on Korea. Having sketched this background, I will turn to the actual handling of crises, explaining why we found certain types of solutions useful in Sweden - leaving it to you to consider whether the same might apply to some extent to your country. 2. Background The macroeconomy First, let me say a few words about the macroeconomic background to the crisis in Sweden. There are both similarities and differences between Sweden and Asia. In the following I will touch on some of them. It should also be remembered that substantial differences also exist between the Asian countries. One common factor is the fixed exchange rate. In Sweden this led to high levels of foreign borrowing, particularly in the private sector. In addition it made it difficult to counter the gradual overheating of the economy by applying contractive monetary measures - raising interest rates tended to increase capital inflows which, to the extent they were monetised, further contributed to the overheating. Following the deregulation of the domestic financial market, the crisis in Sweden was also preceded by a rapid expansion of credit; in the course of five years, private borrowing grew from 85 to 135 % of GDP.
In our case, some things, such as financial deregulation, were achieved during the 1980s (although obviously not enough) and supported demand when this was already strong. Later on, when the economy was on its way down, tax changes were implemented that encouraged saving. To this should be added the mistake I have already mentioned, of not liberalising outward capital flows at the same time as the domestic credit market is deregulated. BIS Review 65/1998  -4-  The crisis culminated in the fall of 1992, when for a few days repo rates were raised to 500 per cent in the vain hope of stemming currency outflows. Interest rate hikes and other contractive measures for defending the fixed exchange rate in the midst of European currency turmoil further exacerbated the economic downturn and added to the banks’ loan losses. All in all, in the three years from 1991 to 1993, Sweden’s GDP fell by a total of around 6 per cent. Before the financial crisis had even been recognised in the summer of 1992, production had probably already fallen by 2-3 per cent. It is my impression that the process in these respects has been quite different in Asia, perhaps apart from Thailand. Growth did not drop much before the crisis. More important were the direct contagion effects, particularly via financial markets. Other “triggers” were political, such as uncertainty caused by upcoming elections, and perceived balance of payments problems. In many respects the process - once it had started - was also more rapid in Asia.