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. 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. 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. let me now turn to these. the financial systems had not adapted to the change from a sheltered environment to a deregulated and much more competitive situation. in the earlier environment, banks had had little incentive to develop a sophisticated credit culture, involving comprehensive evaluations of debtors, projects and collateral. ( one important similarity between sweden and korea was the overoptimistic reliance on collateral and other guarantees, rather than on the viability of the loan project itself ). when deregulation was a fact, bank managers saw a chance of gaining market share and increasing revenues by taking new risks, but did not clearly see the dangers in

peg had been abandoned, demand got a stimulus. the task confronting policy makers was to restore the credibility of economic policy. this required in our case, given the weak fiscal position, very strong fiscal measures ( some 8 per cent of gdp 1994 - 98 ). but it also called for a consistent monetary policy. however, and this is important to underline in the present context, if the financial problems had not been managed properly, they could easily have been a drag on the macro economy. for example, by taking prompt action it seems that we largely avoided a “ credit crunch ”, which was a possibility that worried people a lot at the time. credit volumes obviously fell, but this could be explained by the reduction in demand. briefly, the important components of the solution for the financial sector were as follows : 1. the government, later confirmed by parliament, issued an unlimited guarantee stating that no depositors or other counterparties to swedish credit institutions would suffer any losses. this was a fundamental measure in order to restore confidence in the swedish banks both from domestic and from foreign depositors and other counterparties. the results showed themselves rather quickly, e. g., in the form of renewed interbank credit lines with foreign banks. also the swedish public remained calm and there were no runs on the banks. however, the government ( parliament ) guarantee and the other measures must also be made known to all interested parties. 2. the mandate to implement the support policies was given to a new agency, the bank support authority, which was at arm ’ s length from the political sphere but accountable to the government. to avoid conflicts of interest, it was found appropriate not to have the support authority in either the ministry of finance, the central bank or the financial supervisory authority. 3. a common framework of measures was constructed for support of the banking system. a strategy for deciding which banks to reconstruct and which to liquidate was developed and explained to the general public. the measures were designed to minimise costs for the government and the risk of moral hazard. consequently, shareholders were not covered by the government guarantee and would lose their equity investments to the same degree as the government had to provide support for their banks. this provided an incentive to the owners to avoid applying for state support unless it was absolutely necessary, to minimise the amount of support and to reduce the time - period of receiving support. we used a very simple, but clear and easy - to - explain, method of identifying banks which should