“I don’t think that we can see the European banking system as just a eurozone banking system,” said Borg, whose country is a member of the European Union but not the single currency club.
Sweden, considered to have some of the strongest public finances in Europe, “will not be unaffected by a general European crisis and it is in our interest to be part of a European solution,” he told AFP, insisting the Scandinavian country needed a seat at the table where a solution is hammered out to the turmoil.
“We cannot see a recovery in the world economy if we do not see a stabilisation of the European banking system,” he insisted.
Borg, who has been hailed as the mastermind behind Sweden’s strong economy that in 2009 bounced back from a deep recession, pointed out that the country has “a very strong balance sheet in our public sector” and a central bank with “the muscle and strength to deal with situations that occur”.
Although Swedish banks also generally boast strong fundamentals, the country’s export-reliant economy means they are very dependent on liquidity from the dollar and euro markets, he explained.
“There is a vulnerability that we have such a high degree of currency financing… (So) if we don’t get stability in the European banking system that could also cause big problems in Sweden,” Borg said.
Europe’s banking system is being hammered in the current crisis as eurozone leaders scramble to boost the European Financial Stability Facility (EFSF) to a $440 billion lending capacity.
Borg meanwhile insisted that to end the turmoil Europe will not only need to dramatically write down Greece’s towering debt and significantly strengthen the EFSF, but also create a “pan-European solution for a backstop,” for the serious cases where neither the private market nor national governments could help recapitalise floundering banks.
The best option, he suggested, would be to use the European Investment Bank
since “it is actually in existence already and can hit the ground running (and) if you’re going to convince European taxpayers (to contribute) there has to be some leverage”.
In addition, he advised, “we also need to see a very stringent dealing with the bank restructuring, because if Swedish, German and British tax payers are going to put tax money into other countries’ banks, (they) are going to want to safeguard their money.”
For an idea on how to handle the turbulence, he said Europe should look to Sweden’s handling in the early 1990s of its deepest economic crisis since the
Depression, which followed years of crazed property speculation and deregulation of its credit markets.
The Swedish government took control of its struggling banks in exchange for emergency aid, thus making the taxpayers who were footing the bill owners of the ultimately valuable assets.
Once the crisis was over, the Swedish state sold off nearly all of the nationalised bank investments, getting back most of the money that had been pumped into the sector.
“One of the core lessons (from the 1990s crisis) is that you should safeguard banks and not bank owners. You need to recapitalise banks while diluting the previous owners,” he said, stressing the importance of avoiding situations like the US rescue of AIG, which then proceeded to pay out huge bonuses and dividends.
By following the Swedish recipe and acting “in a cool and conservative manner … it’s very likely you will get your money back,” he said, voicing optimism that the current crisis can be solved.
“There are many difficult decisions that need to be taken in the next few weeks (in Europe), but I think we are starting to see the components of a solution,” he added.
Sweden, which in recent months has dramatically lowered its growth estimates and seen its previously forecast budget surplus evaporate, still has a good chance of weathering the storm, according to Borg.
If a solution is found to the European turmoil, he said, “I think Sweden has the fundamentals for a tiger leap out of this crisis”.