gdp dropped by a total of 6 per cent. aggregate unemployment shot up from 3 to 12 per cent of the labour force and the public sector deficit worsened to as much as 12 per cent of gdp. a tidal wave of bankruptcies was a heavy blow to the banking sector, which in this period had to make provisions for loan losses totalling the equivalent of 12 per cent of annual gdp. while this course of events stemmed, as i have indicated, from a variety of factors, it was no doubt the financial vulnerability that helped make it so dramatic. the swedish economy was steadily approaching a situation that entailed both a banking and a currency crisis. matters were most acute in the fall of 1992 in conjunction with the european currency unrest. the crisis in banking was triggered, not by a classic bank run but by a loss of international confidence and difficulties with international financing. in many respects the crisis in sweden resembled what has happened in a number of other countries. by the summer of 1993 the economy was becoming more stable and the problems in banking receded. fiscal and monetary policy contributed to this and so did a deliberate policy of handling problem banks. the private sector ’ s financial balance underwent a dramatic change, moving from a deficit of about 8 per cent of gdp in 1990 to a financial surplus of over 11 per cent in 1993. this was a swing of almost 20 percentage points of gdp in the course of only three years. a good deal of the swing no doubt came from private sector adjustments to cope with insufficient solvency. falling asset prices in conjunction with high debt levels lead to balance - sheet problems in the private sector. the automatic stabilisers in the government budget probably helped to lessen the contraction of gdp. this meant that business profits and household disposable income were sustained relatively well. but it also entailed a massive increase in the budget deficit and this in turn generated new problems. the government debt trend became unsustainable and economic policy ’ s credibility was weakened. in the early stages of the crisis, monetary policy was directed to maintain the fixed exchange rate. this line had broad support among the general public as well as in the political system. the aim was to establish a low - inflation policy once and for all. but in spite of major efforts, both political and economic, the international currency unrest in november 1992 meant that the fixed exchange rate had to be abandoned. it was replaced by a flexible exchange rate and an explicit inflation target. this resulted in a considerable de

world. this symposium is a positive sign that matters have changed in that respect. the conclusion drawn by the riksbank is that various indicators must be followed systematically with the aim of detecting any signs of potential financial problems and systemic risks. - in sweden ’ s case the supervisory authority was not prepared for the new environment that emerged after credit market deregulation. this meant that during the 1980s the banks were able to grant loans on doubtful and sometimes even directly unsound grounds without any supervisory intervention. in addition, in many cases the loans were poorly documented. the lesson from this is that much must be required of a supervisor operating in an environment characterised by deregulated markets. 2. if a financial crisis does occur in a sense all major financial crises are unique and therefore difficult to prepare for and avoid. once a crisis is about to develop there are some important lessons concerning its handling that can be learnt. - if an economy is hit by a financial crisis, the first important step is to maintain liquidity in the banking system and prevent the banking system from collapsing. for the management of sweden ’ s banking crisis the political consensus was of major importance for the payment system ’ s credibility among the swedish public as well as among the banking system ’ s creditors throughout the world. the transparent approach to the banking problems and the various projects for spreading information no doubt had a positive effect, too. - the prompt and transparent handling of the banking sector problems is also important. the terms for recapitalisation should be such as to avoid moral hazard problems. - automatic stabilisers in the government budget and stimulatory monetary conditions can help to mitigate the economy ’ s depressive tendencies, but they also entail risks. economic policy has to strike a fine balance so that inflation expectations do not rise, the exchange rate weakens and interest rates move up, which could do more harm than good. in this respect a small, open economy has less freedom of action than a larger economy. - it is important both to avoid a widespread failure of banks and to bring about a macroeconomic stabilisation. the two are interdependent. the collapse of much of the banking system would aggravate the macroeconomic weaknesses, just as failure to stabilise the economy would accentuate the banking crisis. references feldstein, m., ( ed. ), ( 1991 ), the risk of economic crisis, nber conference report, university of chicago press, chicago and london.