The credit expansion coincided with a protracted boom and a significant proportion of the borrowed money was spent on speculation, both in real estate and in financial assets, such as equity. The real estate speculation in Sweden culminated in a bubble that burst in 1990-91. Shielded by the economic upswing, there had been many misdirected and overly optimistic investments in various industrial and other projects. BIS Review 65/1998  -2-  In these aspects I find similarities between Sweden in the late 1980s and the Asian countries during the 1990s. A feature common to Sweden and Korea was, moreover, that the domestic financial market was liberalised long before the external capital outflows. This meant that overheating of the domestic economy could not be adequately balanced by capital outflows for investment abroad. But there are also some differences. Other factors that contributed to Sweden’s acute crisis were a relatively deep international downturn and high interest rates in our part of the world in the wake of German reunion. On top of this, our fiscal position was more vulnerable, entering the 1990s with a public debt-to-GDP ratio of around 40 per cent. Sweden’s external borrowing ratio was also high - some 30 per cent of GDP. Besides reflecting the public budget deficit, this had to do with an extremely low private savings ratio. In some years this ratio was actually negative. These weaknesses made Sweden highly vulnerable to shifts in confidence in our economy. The financial sector There were also underlying weaknesses in financial systems.
Among other things, restoring confidence involves being transparent about the problems and about the measures for dealing with them. It also means that measures are implemented as stated by the responsible authorities, without any deviations in timing or application. Just the suspicion that specific industries or other interest groups may be receiving unjustifiably favourable treatment would quickly erode any confidence. 2. Transparency is important. A severe crisis wipes confidence out - rightly so. We realised that it was up to Sweden to regain it. To do so, all the cards had to be on the table. The extent of the losses and the magnitude of the bad loans had to be revealed in their entirety and valuation had to be prudent. If you hide losses initially or are overly optimistic in valuations, you risk having to apply again to the international investment community or to taxpayers for additional support. This, in my view, might jeopardise confidence and legitimacy. It is also necessary to have highly transparent and fair “rules of the game” for government support to the financial sector, not least to avoid political bickering. The responsibility for transparency falls primarily on two parties: the authorities and the banks. The authorities must be transparent about the broad framework for the solution of the crisis and the banks must be transparent about their losses and other deficiencies, financial position and need for external support. 3. Someone must take the losses.