This Crisis is Not Eternal.

Not least the Swedish 1990s crisis and how the Swedish government, authorities and the Riksbank handled that situation. I remember, as I was there. I was a political expert for then Minister of Taxation and Financial Markets, Mr Bo Lundgren.

There was no template to apply at the time. I remember how Urban Bäckström, then Lundgren's State Secretary, led us down to the library to research articles in the journal Econometrica from the 1930s to study how debt deflation spirals were handled in the past.

In the midst of a searing financial crisis, bank guarantees were invented. Nordbanken (today better known as Nordea) was nationalised and then privatised again. Bad guarantees were separated. The financial system survived and the vast majority of the SEK 65 billion that the rescue package cost was eventually recovered in the end.

Bo Lundgren, Urban Bäckström, Stefan Ingves and others were central figures in this innovative work. No wonder the US Congress used the Swedish 90s case as a starting point for debate after the Lehman Brothers collapse in 2008-09.

I think quite few people know how close we were to systemic collapse back then. We were hours away from a classic bank run that could have brought down our entire financial system.

The 90s was a crazy time. Sweden was not yet a member of the EU and we had a fixed exchange rate. The tax reform at the end of the 80s and the deregulations in the credit and currency markets had been implemented in the wrong order and contributed to the inflated bubble.

There, in the fall of 1991, the worst financial crisis that Sweden had experienced since the depression of the 1930s began. The real estate bubble burst with a bang and threatened the entire financial system when bank after bank realised that the value of their underlying collateral did not correspond to the nominals.

This whole sequence of events led to a debt deflation spiral: that is when individuals and companies tried to clean up their balance sheets by unwinding assets - further decreasing the value of these - which in turn created a negative spiral of panic selling. At the same time, the Riksbank had to raise funding rates to defend the fixed exchange rate, which amplified the negative effects.

On my fifth day in office - in early October 1991 - one of the largest banks rang to let us know they had run out of liquidity. The debt deflation spiral had hit straight through and the banks were left with hundreds of billions of bad credit.

We eventually survived the 1990s crisis through a number of system-critical decisions to be carried with us to the next crisis: the fiscal policy framework, the budget legislation, the independent Riksbank as well as EU membership with its deregulations and the free trade that was, and is, crucial for Sweden. But also the Industrial Agreement in 1997, the Security Agreements and the creation of the Mediation Institute, which organised the labour market.

During the next crisis, 2008-09, I was the Swedish Minister of Employment. We felt quite satisfied there, in the middle of the term. The major reform of unemployment insurance had helped finance the in-work tax credits and lowered the equilibrium unemployment rate by several per centage points. We reached a new record in hours worked and labour force participation, and had the OECD area's fastest falling unemployment rate. Suddenly Lehman Brothers collapsed, and we had to initiate crisis management for what I so sensitively called the "shit years" thereafter. At that time the crisis was certainly deep, but the chain of events was much faster. The experiences and system reforms from the 90s crisis, as well as the state finances being in order this time, made us significantly better prepared.

And then there was an unusually large pool of people with experience from the previous crisis, now at other positions, where that particular experience came in handy. Stefan Ingves was head of the Riksbank and in the 1990s had been head of the Office of Financial Markets, which was crucial in handling the crisis at that time. Both of his predecessors as governors of the Riksbank had worked at the Ministry of Finance during the 90s crisis. In 2008-09, Anders Borg was Finance Minister, and a few years later he was named Europe's Best Finance Minister by the Financial Times. The now incoming governor of the Riksbank, Erik Thedéen, was one of Borg's State Secretaries right at the end of the last crisis.

The point being made here is that in the upcoming crisis, we have experiences, people and frameworks in order. We have actually survived eight financial crises since 1880, so we will most likely make it through this one too. We have just lived through a number of years where the cost of money - the interest rate - has been close to zero. It creates an environment that is fundamentally flawed. Free is good, but of course, it has pushed valuations through the roof, much like before the dot-com crash in 2000.

It is the transition from a zero-interest-rate environment to a slightly higher level that is painful and challenging. But at the same time, I remember that when I moved out from my parents in 1985, you had to pay 14.5 per cent interest on a three-month mortgage. Even in that environment, business was conducted and capital was invested, both in unlisted and listed equities as well as in real assets.

What happens right during the adjustment process is that bad gets worse and good gets better — if it survives. Inflated bubbles burst. Facades are cracking. But talented entrepreneurs and smart innovations - whether incremental or revolutionary - find new routes to the market. The adaptability created by a crisis builds cultures in these companies that create winners over time. It is just like I remember my grandmother saying: it is the small expenses that make a difference. People are holding on to their money. Cash is king. Paying customers is what matters. And paying customers will emerge if you solve problems.

Quality becomes even higher in a crisis. And at the same time, valuations drop significantly. If there is ever a time to invest in unlisted equities, it is now. Certainly, the risk is high, but it is actually lower now than when the economy ran like clockwork, given that the entrepreneurs are exceptional.

This crisis is not eternal. One day Putin will be gone and the energy crisis will have been dealt with. We may not see zero interest rates again for a long time, but we are adapting. We survive. We produce. We sell and we export. That said, we have been through tough times before and know how to deal with them. If nothing else, this year's Nobel Prize in Economics shows just that. Sweden has lived through the theories that won the Nobel Prize in Economics in 2022.

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Stockholm on October 11, 2022

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Sven Otto Littorin

Partner, Stadsholmen Equity