Bailouts May Mark `Beginning of End' to Crisis, Lundgren Says

By Anchalee Worrachate

Oct. 14 (Bloomberg) -- The biggest bank rescue in European history may mark the turning point in attempts by governments to end the seizure in credit markets, according to Bo Lundgren, who masterminded Sweden's bailout package in the 1990s.

``It seems to me this is the beginning of the end of the crisis,'' Lundgren, who now heads Sweden's National Debt Office, said in an interview. ``There might be more losses and writedowns, but what governments in the U.K. and Europe have done and promised to do now should be enough. The market should take note of what they have done and calm down.''

France, Germany, Spain and Austria this week committed 1.1 trillion euros ($1.5 trillion) to guarantee loans and take stakes in their beleaguered banks. The U.K. yesterday took majority stakes in two of its biggest lenders. The U.S. will invest about $125 billion in nine institutions, including Citigroup Inc., according to people briefed on the plan.

Lundgren was Sweden's minister for fiscal and financial affairs when the country's banking industry got into trouble after a speculative bubble burst in the late 1980s. The government committed itself to a bailout in 1992 and the Riksbank raised its key interest rate to 500 percent to prevent a run on the currency. The measures were so effective that the Bank Support Authority, an independent body set up to manage the crisis, was no longer needed by 1997.

`Harsh Conditions'

Sweden prevented a meltdown with a ``comprehensive plan,'' Lundgren said in the interview yesterday from Washington, where he attended the World Bank meeting during the weekend. ``The aim was to restore confidence in the market, to recapitalize banks and to do it with harsh conditions to protect taxpayers' money.'' Proposals included a $14 billion restructuring fund to provide ailing banks with capital in return for equity, and guarantees for creditors and depositors at 114 banks.

The Bush administration will announce a plan that includes spending about $150 billion for preferred shares in nine major banks, people briefed on the matter said yesterday. Though the U.S. was the first to respond to the crisis, with Treasury Secretary Henry Paulson's $700 billion bailout package, a decision to take stakes in financial institutions would mirror the approach taken by European governments.

``Perhaps they were initially afraid to go in with ownership shares,'' said Lundgren. ``The U.S. is lagging behind. What I think is needed in the U.S., and is not in place now, is something comparable to the interbank guarantee that the European counterparts are going to give.''

If the bailout plans are well-managed, the burden on taxpayers will be minimized, he said. At the start of the Swedish program, the cost to the government was estimated by economists to 65 billion kronor, about $15 billion at the time and approximately 4 percent of the country's gross domestic product. By 1997, it was calculated at 2 percent of GDP, or 30 billion kronor, Lundgren said.

``Some economists estimated last year that after taking into account dividends and the proceeds from bank privatization, the net cost was zero,'' he said.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net