Sweden Prime Minister Proving Tough Love of Banks a World Model

Sweden’s bank rescue model has protected taxpayers, turned a profit and left the Nordic country less indebted than when the financial crisis started in 2007.

It’s the opposite of what’s happening in the U.K., where the government’s debt burden has doubled in the past four years and taxpayers are still footing the bill to bail out banks.

“In 2006, when I became prime minister, the U.K. and Sweden had the same ratio of national debt to gross domestic product,” Swedish Prime Minister Fredrik Reinfeldt, 46, said in an interview. “The U.K. has now doubled and Sweden has gone below 40 percent and this is linked to dealing with the banks.”

As lenders across the globe resist stricter regulatory controls they say will hurt earnings, Sweden’s commitment to enforcing rigorous standards has paid off. Companies like Stockholm-based Nordea Bank AB (NDA) are better capitalized than most of their European and U.S. rivals, and have better access to funding markets and a lower risk of default. Tougher controls enacted during the Swedish banking crisis of the 1990s also have protected the state budget, which will be in surplus this year.

“We introduced a lot of fees in the system, we increased transparency,” Reinfeldt said Nov. 8 during an interview in Stockholm’s Rosenbad, his Art Nouveau-style waterfront office building that used to be the headquarters of Nordiska Kreditbanken before it was acquired in 1917 by a local competitor. The corridors leading to Reinfeldt’s office are hung with pictures of Swedish cabinets going back to the 19th century.

Cover Risk

“We increased regulations to secure that they have better control, that they cover their own risk,” said Reinfeldt, who did his compulsory military service as an Arctic ranger and holds a degree in business administration and economics from Stockholm University. “We have a surplus when it comes to taxpayers, which distinguishes Sweden from many other countries.”

Sweden’s debt will shrink to 36.3 percent of GDP this year from 40.2 percent in 2007. In the U.K., the public debt burden will widen to 84 percent in 2011 from 44.4 percent, the European Commission estimates.

The Nordic nation’s economy will expand 4.4 percent this year and 3.8 percent in 2012, the International Monetary Fund said in September. Output in the U.K. will grow 1.1 percent in 2011 and 1.6 percent in 2012 and the economy of the combined euro area will grow 1.1 percent in 2012, while U.S. output will expand 1.5 percent in 2011 and 1.8 percent in 2012, the IMF estimates.

Welfare System

Reinfeldt ended 12 years of unbroken rule by the Social Democrats in 2006 to become prime minister on promises to ease the world’s highest tax burden and protect the country’s cradle- to-grave welfare system. The Social Democrats had built the model while in power during six of the previous seven decades.

The Stockholm native, who’s married with three children, gained a second term last year, becoming the longest serving conservative premier since 1930 after presiding over the fastest economic rebound in the European Union.

Since the financial crisis erupted in 2007, one Swedish bank -- Carnegie Investment Bank -- was wound down after it became clear state support wouldn’t keep it solvent. The government seized Carnegie in November 2008, and resold it three months later for 2.3 billion kronor ($344 million), recouping the value of the original state loan.

Bank Guarantee

Reinfeldt’s guarantee program, which backed as much as 1.5 trillion kronor of bank obligations, will bring in a 5.8 billion-krona profit by 2015 when the loans expire, the nation’s debt office said in its latest report in August.

In the U.K., where the government bailed out Royal Bank of Scotland Group Plc (RBS) and Lloyds Banking Group, the total outstanding support explicitly pledged to Britain’s banks stood at 456.3 billion pounds ($730 billion) at the end of March, or 31 percent of GDP, the National Audit Office said in a July report. The amount was down from a peak of 1.16 trillion pounds.

Three Swedish banks occupy the top four slots of European lenders with the highest price-to-tangible book value, which strips out goodwill and other intangibles. By that measure, Nordea is valued at 1.15 by equity investors and Svenska Handelsbanken AB is at 1.22.

The price-to-tangible book value median for European lenders is 0.79, data compiled by Bloomberg show. London-based Barclays Plc trades at a ratio of 0.52 and Royal Bank of Scotland is at 0.41. Germany’s biggest lender Deutsche Bank AG is valued at 0.68 and Citigroup Inc. trades at 0.61 in New York.

Stricter Standards

Sweden now wants to enforce stricter capital standards than those set by the Basel Committee on Banking Supervision, and plans to introduce the measures ahead of Basel’s 2019 deadline.

Reinfeldt said maintaining income equality through all economic cycles is key to preventing imbalances that disrupt growth. The government also is shelving state assets sales after reaching its target for reducing debt, he said.

Even after four rounds of income-tax cuts, Sweden has the second-highest tax burden as a percentage of GDP after Denmark, and one of the world’s highest levels of income equality, according to the Organization for Economic Cooperation and Development.

“A good society does not have huge differences,” Reinfeldt said. “If you build trust among people, and I think you need that, then they shouldn’t get far apart from each other.”

To contact the reporter on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net

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