Japan, Sweden hold bailout lessons for US

[February 13, 2009]  TOKYO (AP) -- As the U.S. grapples with its banking crisis, President Barack Obama is pointing to Sweden and Japan as offering lessons for what the United States should -- and shouldn't -- do.

Both faced banking crises in the 1990s, but reacted differently.

Sweden moved quickly, nationalizing two banks and setting up an asset management company to take over bad debt. In contrast, Japan waited seven years before getting serious about bailing out its banks. The result: a "lost decade" of economic stagnation -- a fate the U.S. president says America must avoid.

On the surface, Sweden "looks like a good model," Obama said at his first prime-time news conference Monday. But he cautioned that drawing parallels had limits: Sweden's banking sector is far smaller and the country's culture embraces a greater economic role for government.

Of Japan, Obama said: "They kept on trying to paper over the problems. The markets sort of stayed up because the Japanese government kept on pumping money in. But eventually, nothing happened and they didn't see any growth whatsoever."

Japanese economists commend the U.S. for starting to take action far more quickly than did Japan. The Obama administration's bailout plan, which includes a public-private fund of up to $1 trillion that would seek to purchase bad assets weighing down banks' balance sheets, is a step in the right direction, they say.

Still, some experts in Japan say the U.S. plan is too vague and that Washington isn't acting decisively enough to take the painful moves necessary to clean up the banking sector -- crucial to getting the economy back on a recovery track.

A major problem in the U.S. crisis is that assessing the bad debts is complex because they involve mortgages sliced into millions of securities that passed from one holder to another, said Hiroshi Watanabe, economist at Daiwa Institute of Research in Tokyo.

"It's a nightmare that might take so long it would be mind-boggling, a task for mathematical whizzes," Watanabe said. "Japan was groping in darkness in trying to fix its bad debt mess. At least, the U.S. knows from the Japanese experience the general path it must take."

Japan's banks then, like America's today, were burdened with mountains of bad loans after a real estate boom collapsed in the early '90s. But it wasn't until 1999 that Japan's bailout process began in earnest, when the government set up the Resolution and Collection Corp. to handle the disposal of loans that weren't being repaid.

While Japan's government was able to recoup a sizable amount of public outlays by selling loan collateral, most often land, the process has taken years -- it still isn't over. The net public cost was 18 trillion yen, or about $168 billion, according to the Financial Services Agency, far less than the estimated 50 trillion yen ($473 billion) to 70 trillion yen ($663 billion) total spending.

To spur growth while dallying on the bailout, Japan embarked on a huge public works campaign. That also holds lessons for Washington, where congressional leaders just agreed on a $790 billion economic stimulus bill that includes tax cuts and spending on ecological technology and infrastructure.

Japan spent trillions of dollars on projects that some criticized as wasteful, such as paving riverbeds and building highway tunnels and airports in rural areas that even today get very little use.

"They dug up roads," said Yasuo Yamamoto, economist at Mizuho Research Institute. "The least they could have done was make roads easier to use for the elderly. That would have served a real purpose for Japan's aging society."

Experts say the money would have been better spent on areas with growth potential, such as Internet technology or energy independence -- closer to the goals outlined in the U.S. stimulus package.

All told, Japan spent 560 trillion yen, or $6 trillion, on public works from 1991 to 2007 -- leaving the government with huge budget deficits.

Koetsu Aizawa, economics professor at Saitama University, warned that the U.S. stimulus plan doesn't go far enough in fostering new businesses, risking the same entrenched stagnation that Japan faced in the 1990s, he said.

"The Obama administration has definitely studied Japan's mistakes," Aizawa said. "But what it's doing is still similar to what Japan did in doling out public works. I'm worried whether the U.S. fully realizes the severity of the crisis and the need to reshape its industries."

By contrast, Sweden overcame its crisis, also caused by a collapsing housing boom, in the early 1990s quickly -- and with bailout money fully recovered.

The government nationalized two banks, Nordbanken and Gota Bank, and created a so-called "bad bank" to take on troubled assets, mostly real estate, which were sold off once market conditions improved.

The system allowed the government to recoup the $10 billion -- or 4 percent of Sweden's annual gross domestic product -- it spent on salvaging the banks. In addition, Sweden emerged with a healthier financial sector that has withstood the shocks of the current global meltdown relatively well.

Unlike Japan, Sweden's government made it clear right away how bad the losses were, which officials said was key in restoring confidence. And there was pain: bank shareholders were wiped out.

"People have to know that 'this is how big the problems are, and this is how we're going to take care of it'," said former financial markets minister Bo Lundgren, one of the architects of the bailout.

Lundgren and others believe the Swedish model could help the U.S., despite the difference in the size of the countries and the scope of the crises.

They point to transparency, political consensus and effective coordination between financial authorities as some of the ingredients of the Swedish success.

"The general principles are the same whether you have a huge or small banking system," said Goran Lind, a Swedish central bank official involved in the bailout.

"To get out of a crisis you have to restore confidence towards the banks," he said. "All involved must trust that the full scope of the problem has been disclosed and that there is a credible solution. That's what permeated our thinking in the '90s."

[Associated Press; By YURI KAGEYAMA and KARL RITTER]

Associated Press Business Writer Yuri Kageyama reported from Tokyo and AP writer Karl Ritter from Stockholm.

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