Sweden was once widely admired as the welfare state that works. But with the free financial market making inroads, Stockholm is discovering how highly leveraged its economy is. Real estate values have plummeted by 30% to 40%, and banks are tottering.

One hot spot is Nordbanken, a huge state-controlled bank competing in the private sector. Some estimates claim it is $500 million in the red right now, and the final bill is bound to be much higher. Nordbanken's woes have plunged such blue-chip multinationals as Esselte into chaos. Sweden's finance minister recently dissolved the bank's board, and the government has called in banker Jacob Palmestierna to straighten out the mess at Nordbanken. But Sweden's powerful unions are unhappy, claiming that workers will pay for bailouts of the wealthy.