Swedish Copy and Paste? No Thanks, We're Irish

In 1992, Sweden found itself with the same kinds of property trouble that Ireland would face in 2008. While Ireland ended up in the clutches of the IMF, somehow the Swedes escaped such a fate; why couldn’t Ireland’s leaders have done a “copy and paste”.  In this weeks, episode, Marcus and Paul look at Chapter 19 of Paul's new book, “A Politician’s Guide to Finance and Money”, to see how exactly the Swede’s pulled off a financial Houdini and what lessons it holds in the current climate.

Warning: This podcast does not constitute financial or tax advice.  Please contact a financial advisor or tax advisor to discuss your own individual circumstances, taking into account your needs and objectives, knowledge and experience and financial situation.

Transcript

SPEAKER_01 0:01

Welcome to Catch Lads. My name is Paul Malloy from BoxcoverTax.aue, and this is Marcus Doyle from Clear Financial. We're here to take the mystery out of money and finance with some history, some stories, and plenty of humor too.

SPEAKER_00 0:20

Hi there everyone. Welcome to today's podcast. Marcus, how are you gonna get on today? Pretty good. Pretty good. Good, good. We often hear when when an economy is going very strong, we often hear someone somebody say, This time is different. Every time. This won't be like the last time. This is new. What we're doing is different, you know. And uh it's never different. Remember the soft landing remote gas. Soft landing. Soft landing. Yeah, yeah, yeah. The fundament the fundamentals, the the you know, you know, the fundamentals are sound. I remember that one. So we're today going to talk about Sweden, and this is particularly relevant from an Irish point of view, because Sweden is one of those very, very rare countries that got into trouble and escaped without being too badly bruised. And uh Ireland were with the the you know the people in government were made aware of what Sweden had done, had been told that the Swedes had a blueprint for how to escape the crash of 2008 once we got ourselves into trouble. And unfortunately, the Irish uh government didn't do what Sweden did, and we all paid a very, very, very heavy penalty for that. So that's why you know Sweden. This had happened in 1992, 2008. Sweden's pretty close by, it's not that long ago. So, like we we should have we should have paid more attention. Unfortunately, we didn't, but Sweden got themselves into a very similar problem to us, uh, in that in 1985 legislation was brought in by the Swedish government that dramatically increased the amount of credit that banks could give to borrowers, whether that's for construction um or residential.

SPEAKER_02 2:06

But like the Carlsburg ad, there's the money you pay it back when you can.

SPEAKER_00 2:09

Pay it back when you can. Um and naturally, when this happens, when credit becomes easy and everyone has access to money, it chases up the price of property. Like if I'm bidding on not that I could ever afford Shadow Doyle, but if if if if I'm bidding on it, try and find Chateau Doyle on Google Maps. If I'm the only one bidding, I've got a much better chance of of getting it. Whereas if there's 10 people bidding, it's gonna chase up the price because everyone's got access to bidding.

SPEAKER_02 2:39

Everyone can understand that now because a house has gone up for sale in Ireland. It'd be very conservative at half a million, but then it's like 600 before you know it. Exactly. Everyone's bidding on it. Everyone's bidding on it.

SPEAKER_00 2:49

So so this is what happened in in Sweden, and there there's there's a lot of demand in in economics, not to get too technical, but it's a simple enough one to understand. When the price of something goes higher, I want less of it. You know, so if I um, you know, just take something like I don't know why for some reason pizzas are coming into my mind, maybe I want with her later on. You love your pizzas. Um, but I mean, if if I'm used to to to the price of pizza being you know five euros and it goes up to seven or eight, I'm gonna, or I'm gonna I'm gonna buy less. You know, I mean I'm just I'm gonna buy something else in instead. But with a salad, maybe a salad, well, I wouldn't go that far, Mario. But with uh with with with property, the the law of demand seems to just go go in reverse, in that you know, if I can see the prices of properties are going up and I want to buy first house or uh you know farming in Leicester, the higher the price goes, the more I will feel it's only going to go higher still. So higher prices actually increases demand. It doesn't reduce it. It doesn't form any logic. So 1985 up to about 1990, they had quite the hoolie in uh in Sweden. Um you know, prices had had had gone very, very uh, or property had gone very, very well. And then a couple things happened, and probably the most important thing that happened because Sweden had its own, because the Krona had its own currency. Um German unification, which we talked about in a previous podcast, meant that the the German government had to spend a lot of money to get Eastern Germany up to up to scratch, up to the level spent a fortune on roads, buildings, infrastructure, all that stuff. But prices in Germany started to rise. Germans don't do inflation, they they nixed that immediately, they increased their interest rates, and that had a very, very important impact on Sweden because they pegged their currency to something called the European currency unit, which I don't think it's around anymore, but it was kind of like a virtual currency before the euro. And they they they pegged their currency to that because they're trying to keep, we talked about exchange rates before, they're trying to keep prices stable for their exporters and for their importers. So it's very, very they they really it was it was almost like us and our corporation tax rate. Do you know the way we're just like got to keep that 12.5% rate? Well, um, we still have for SMEs, but um, you know, we that that was the mainstay of the Irish economy for a long time. That rate for the Swedes, it was we must maintain this exchange rate, but naturally, uh Germany increasing interest rates put pressure on Sweden because they suddenly had to start increasing their interest rates. Now, we've talked before about what happens to property when interest rates starts to rise. Suddenly, everybody thinks, whoa, maybe I won't buy that, you know, rezoned land in NACE because I might be able to sell it. It has this very negative impact on the economy. Everyone starts pulling back a bit. Um, and they also brought in a a tax reform in Sweden in the 1990s that initially seems, when I looked at this, seemed quite quite innocuous. But it had the effect of actually increasing um uh interest rates because the the the tax benefits of borrowing kind of kind of uh kind of got greatly diminished. So we've all this upward um upward pressure on Swedish uh interest rates, and the cycle is always the same. So in the 19 mid-1980s, uh credit becomes available, everyone starts borrowing more, prices start going up, everybody's having a great time. But we had that in Ireland in 2005, 6, 7, 8. Um, and then something changes. And so for Sweden, it was definitely German unification was a big factor. Um, but then this this this tax reform seems to have had um an enormous difference. And I I came across uh just when I was uh writing my book, which is Politicians Guide to to Finance and Money. Um great book. Uh it was an article by a lad, he's uh he's he's a Swedish guy, so I'm I I've been practicing practicing his name, but his name is Lars Janong Janung, and he wrote in the European Commission's Economic and Financial Affairs back in February 1990, or sorry, 2009, which is long afterwards, but he wrote about the measures or the steps that um the Swedes had to take. So if we go back to Ireland and we start maybe trying to compare what Ireland and Sweden did, first thing the Swedes did was they guaranteed all the debts of the banks, which which is which is what we did. Okay, up to 100,000, wasn't it? Yeah. So if if if if you've got it in your mind, if you're listening at home or however way you kind of think about these things, you know, we're gonna try and compare Sweden and Ireland. So number one, we can tick them both, right? So they both guaranteed the debts.

SPEAKER_02 7:54

I think then a lot of money come from other countries then because of geez, if it's guaranteed in Ireland, was there money flowing into Ireland because obviously, yeah, and and Britain was furious about this, um, which was Brian Lennon.

SPEAKER_00 8:05

He was so he was so thrilled that that the British Finance Minister was raging, you know. Uh, dig at the old Brits, isn't it? He was he was delighted.

SPEAKER_02 8:13

Yeah, there's money flowing over, I believe, because they people thought, well, if I bring it out to Ireland, at least the hundred grand will be guaranteed.

SPEAKER_00 8:18

Yeah, no, it it it it does have it does have kind of the the these kind of effects, but the the the you don't guarantee the debts of the banks just to help the banks. That's not really what you're doing. You're trying to take away the fear in the economy, take you know, to ask. It's just so that there isn't just you know, mass capital flight, and the banks would would would would be gone. So blanket guarantee Ireland did it. Fox ticked. Now, we started we started going going a bit differently from them at this stage. So the the the rule the opposition social democrats had been in power during the time of the um the liberalization of the bank market. So they they were there for most of the 80s. Um and the ruling um conservative government who are you know if you're the if you're the government when there's a crisis, you will get the blame. But what the Swedes did in, I guess it's just something that the Scandinavians are better at than than than than many of us are, is that they just said, listen, we're in the truth, we're in the worst of the worst here. Neither of us is coming out good here. Let's we've just got to come together. And they did, and they did, and they actually, you know, they would have had their differences, but they they very much, you know, came came came together. Um, you know, obviously we wouldn't have had that, you know. Labour and um and and Fina Gale naturally were were were were uh were getting stuck into uh into Fina Fall.

SPEAKER_02 9:47

Yeah, none none of the parties would, yeah. There's so many now you wouldn't take it now today, but there were so many differences between all the parties. I don't think they'd all be able to come together for the that our crash.

SPEAKER_00 9:57

No, and if we if we go back to ours, just before the the the the crash happened in Ireland, just Brian Lenahan, who's no longer with us, he passed away. Um Brian Lennon Jr. He he became finance minister and he was someone who had more of a legal background. So I think he was I think he was a barrister actually. And um, but he was considered very, very intelligent and um he had he'd done quite well. Um had Cowan appointed him his uh his his his finance minister, but he didn't believe what the civil servants were telling them. It was either he didn't believe them about what they were saying, that things were fine, he thought they were worse than that, um, or he just for for whatever reason, but he didn't have the financial background. He was not a finance, like we're cash lads, right? Cash lads.

SPEAKER_02 10:46

We should know a little bit about it. He he really didn't, and he actually Are we trying to plug a job with the government now? Um we can advise the fight. Sure could absolutely be great.

SPEAKER_00 10:56

Well, now now that uh Pascal Dunhue's gone, there might be quite a queue of people that we need to uh to get involved there. Um hopefully Simon Harris does perhaps better than we suspect he will, but who knows? Um, you know, and apparently Brian Lennon went out to David McWilliams' house at ten a night, right? Saying, David, explain this stuff to me. You know, and they had they literally were there for hours and hours on end. And essentially what what Mike McWilliams was saying was we need to do what Sweden did because they got out of it. It's not that David McWilliams had had I I don't think he would say this, that he came up with this completely novel idea all by himself. He he had been in that world, he worked in central banking, um, he'd worked in the you know other investment banks, and he knew that what Sweden had done had worked. And it became known as the David McWilliams option. You know, that that's how it came to be understood in kind of government in government circles. So the government, the so the government parties getting together, we didn't do that. Um another thing that we didn't do, the Swedes were were very strong on this, is the Swedes went into every single one of the big banks and cleared out the management. They just said, get out of here.

SPEAKER_02 12:13

You know, there's uh Brian Cam was playing golf with the whole lot of them. Well, like Well, isn't it the infamous Anglo-Irish, wasn't there? Something discussed in the golf course that they got.

SPEAKER_00 12:24

He was, he was, he had he had met them quite recently before. And and and the banks, the banks would have just people might not be aware of how the banks had gotten into so much trouble. And what they were doing, especially Anglo, was they didn't have the kind of deposits from the ordinary person that puts their money in a bank and you know leaves it there. Um you know, Anglo didn't really have a lot of that. They had some but not a lot. Um, so what Anglo were doing is they were constantly borrowing money at a low rate, say 3%, 4%, from typically German banks, because they're the ones that have all the cash. And um then they were lending that on. So but once once Anglo lends that money to you or me for 15-20 years, like we're not gonna be coming back. We're gonna be making our repayments, we're not gonna repay that loan in one day. So they need to consistently, like I said before, if I'm borrowing you know, 100 billion from you, you know, and I need to pay you next week, well, I've got to go to Erica, get 100 billion from Erica, pay you off, and now owe Erica the money. So that's how it kind of works. And what was happening with with with our banks, and it it wasn't just AIB, uh Anglo, it was AIB. In in the two of them are really um Irish nationwide. They were really struggling to get refinancing. And instead of saying you can have that money for six months, people were saying you can have it for four or three. That's just gotten narrower and narrow. And that's what happened the night of the bank guarantee. Uh, you know, Anglo was bust, was literally not going to survive the next day, and um AIB was about a week away.

SPEAKER_02 14:05

So that was the idea of the you know, the guarantee that it would take all the in Sweden. Was it just the main banks? Did they have a kind of an Anglo equivalent or was it?

SPEAKER_00 14:13

I I I don't know exactly, but I I get the sense that there was many, many culpable banks. You know, it wasn't just uh it wasn't just uh so so that was something they did very, very differently. They cleared out they cleared out the bank management. And they were Sweden were desperate, as I said before, to keep their exchange rate. That was that was the thing, you know. When I was reading um that article about from Lars Yoonning, um I couldn't believe how important the exchange rate was to them, but it was. And the speculators, if we remember back to the podcast we did recently on um on the UK and George Soros, the speculators were saying there is no way Sweden will be able to cook this up. They'll have a property crash and the Germans are increasing interest rates because of unification and all that. They are just not going to be able to manage this. But they did manage it, and they managed it partially as well because they they communicated so well with the public, they fired the bankers, they set up um a bank uh support, uh the the uh bank support authority, you know, and and um to I suppose to to to find the banks that were insolvent, move the bad bad loans out, keep the good loans, that kind of stuff.

SPEAKER_02 15:33

And was there much austerity? Did they increase taxes and reduce spending a lot?

SPEAKER_00 15:37

Yeah, like we did. Yeah, I I don't know exactly, but you can imagine they must have. They must have, they must have had to do that. They must have had to do that. You'd have to if everything's kind of going like that. The or the ordinary person would have borrowed more than they could afford. So I would imagine there was an element of self-imposed. Um but they they they they kept by keeping the exchange rate the way they did, that their their business was able to their businesses were able to keep you know exporting and uh they got they got they got through it. And look, I suppose it can be very, very to go back to the whole this time it's different. Like sometimes it can be very hard to see a crash coming, you know, and um you know I've I've even talked to a couple of people that would have worked in, you know, at Wall Street and the city and places like that, just when I was doing research for the book and said, Did you s did you see this coming? Like you know, the housing crisis in America. Like do you see that? And they just thought we knew it was kind of daft, you know. We didn't really think we didn't really didn't really, but we'd no idea it was going to lead to what it led to.

SPEAKER_02 16:42

They kind of catastrophic. The thought of why a bit of uh adjustment. Yeah, yeah. But I I I find it mad how that obviously the the famous film, The Big Short, how well it's obviously obviously smart guys, but like your your the guy you were talking about when the Brits were getting into trouble, how these smart people they can see it coming and they can make a fortune.

SPEAKER_00 16:59

They can make a fortune, they they they they can make a fortune um you know on it, but in terms of like for example, at the moment there's there's concern about the the big seven and ai. You know, everyone knows that AI is useful, but are these companies going to make any kind of big return from the enormous, like literally trillions that's going into the room? Because they're increasing spending on it. So there are crises like that. There have been. There was the dot-com crisis in 2001. Um even there was uh there was that kind of stock market crash in 1987. Crashes like that tend not to last too long. They tend to last a year. I think that's what we're probably facing at some point, that there will be some kind of correction, very serious correction in the dot-com area. It could have an impact on, you know, we're seeing now the software sector, you know, the software companies are being kind of eroded, their values being eroded by AI. Um, and we could see that kind of year too. But what was different about what happened in Sweden and what happened in Ireland is when banks get into trouble, we are totally screwed. Totally, totally screwed. Because when when a banking system gets blasted like that, they stop lending. They will they won't lend to anyone, you know, and without credit, you can't you can't run a business without credit because you need to pay for things before you can sell them, you know, and and make the money back. Like you need cash flow uh in the short term, and when banks pull that back, every business becomes honorable, you know. So banking crises are the most serious. And I would say if anyone from government uh is listening, um we we must always be vigilant about our banks. And I I do think right now our banks are quite well funded, you know. I think after crash of the new EU rules, you have to have so much reserves. Brandy works in the in the in the big four in this area, and this is his area, you know, and we do have our arguments from time to time about the banks. May I might argue that the banks need more cash, but they do seem to be very, very well well funded.

SPEAKER_02 19:04

The problem from my side with the there's over 200 billion of uh people's money just sitting in Irish bank and it's doing nothing. So I'm trying to encourage clients to get it out. Yeah, no, and I I know and we're and we've saved more than we ever have, but we need to usually start using us, this is the thing.

SPEAKER_00 19:19

We want we want yeah, exactly. We want the the the system to have um the capacity to lend out. But the the thing is if if if the tide goes out and and all your money is lent out, like that's why we we we kind of need to protect banks from themselves, but um they'll always be with us, I think, and uh they'll always need uh a close eye. So I think we're I think we're good for today. Yeah, thank you. No worries. See you next time, folks. See ya. Thanks, Mark.