This dissertation assesses the impact of global fi nance on policy options in the Swedish fi nancial crisis of 1992. The aim is to improve understanding of the impact of global fi nance on state policymaking during a fi nancial Managing Global Finance crisis and to determine the extent to which a state has policy options despite global fi nancial constraints. Choices and Constraints in the Although the impact of global fi nance has narrowed the policy options available to policymakers, this thesis argues that there are still options available and decisive policy choices to make even in the worst case of a Swedish Financial Crisis of 1992 fi nancial crisis situation. This study fi nds the common suppositions in the globalization literature inadequate for understanding a fi nancial crisis as a consequence of their focus on either structural constraints or policy choices, and suggests a constrained choice approach focusing on the interplay between global constraints JOHANNES MALMINEN and policy choices. This study applies the constrained choice approach to three decisions during the Swedish fi nancial crisis. They are the decisions to defend the krona, to support the banks, and to build a political coalition. The study fi nds that global material and ideational constraints, as well as alternative policy options for policymakers, were pre- sent in all three decisions. As the fi nancial crisis worsened, the global constraints on policymaking increased, Managing Global Finance: Choices and Constraints in the Swedish Financial Crisis of 1992 of Crisis Financial Swedish in the and Constraints Choices Finance: Global Managing Malminen Johannes but not to the extent that policy options ceased to exist. In all three decisions, the policymakers waited as a long as possible before making their policy choice. Policy choice was reactive rather than proactive. Policy responses to global constraints became crucial in defending the remaining policy autonomy in the Swedish fi nancial crisis of 1992. FOI is an assignment-based authority under the Ministry of Defence. The core activities are research, method and technology develop- ment, as well as studies for the use of defence and security. The organisation employs around 1350 people of whom around 950 are researchers. This makes FOI the largest research institute in Sweden. FOI provides its customers with leading expertise in a large number of fi elds such as security-policy studies and analyses in defence and security, assessment of different types of threats, systems for control and management of crises, protection against and management of hazardous substances, IT-security and the potential of new sensors. FOI Defence Research Agency Tel: +46 8 5550 3000 www.foi.se FOI-R--1797--SE Defence Analysis December 2005 Defence Analysis Fax: +46 8 5550 3866 ISSN 1650-1942 Scientifi c Report SE-164 90 Stockholm Managing Global Finance Choices and Constraints in the Swedish Financial Crisis of 1992 JOHANNES MALMINEN FOI-R--1797--SE Defence Analysis December 2005 ISSN 1650-1942 Scientific Report Issuing organization Report number, ISRN Report type FOI – Swedish Defence Research Agency FOI-R--1797--SE Scientific report Defence Analysis Research area code SE-164 90 Stockholm 1. Security, safety and vulnerability analyses Month year Project no. December 2005 E1671 Sub area code 13 Support to Security, Safety and preparedness Sub area code 2 Author/s (editor/s) Project manager Johannes Malminen Johannes Malminen Email: [email protected] Approved by Jan-Erik Rendahl Sponsoring agency Krisberedskapsmyndigheten Scientifically and technically responsible Johannes Malminen Report title Managing Global Finance: Choices and Constraints in the Swedish Financial Crisis of 1992 Abstract (not more than 200 words) This dissertation assesses the impact of global finance on policy options in the Swedish financial crisis of 1992. The aim is to improve understanding of the impact of global finance on state policymaking during a financial crisis and to determine the extent to which a state has policy options despite global financial constraints. Although the impact of global finance has narrowed the policy options available to policymakers, this thesis argues that there are still options available and decisive policy choices to make even in the worst case of a financial crisis situation. This study finds the common suppositions in the globalization literature inadequate for understanding a financial crisis as a consequence of their focus on either structural constraints or policy choices, and suggests a constrained choice approach focusing on the interplay between global constraints and policy choices. This study applies the constrained choice approach to three decisions during the Swedish financial crisis. They are the decisions to defend the krona, to support the banks, and to build a political coalition. The study finds that global material and ideational constraints, as well as alternative policy options for policymakers, were present in all three decisions. As the financial crisis worsened, the global constraints on policymaking increased, but not to the extent that policy options ceased to exist. In all three decisions, the policymakers waited as a long as possible before making their policy choice. Policy choice was reactive rather than proactive. Policy responses to global constraints became crucial in defending the remaining policy autonomy in the Swedish financial crisis of 1992. Keywords Sweden, financial crisis, globalization, global finance, crisis management, economic security, policy autonomy Further bibliographic information Language English ISSN 1650-1942 Pages 237 p. Price acc. to pricelist Utgivare Rapportnummer, ISRN Klassificering FOI - Totalförsvarets forskningsinstitut FOI-R--1797--SE Vetenskaplig rapport Försvarsanalys Forskningsområde 164 90 Stockholm 1. Analys av säkerhet och sårbarhet Månad, år Projektnummer December, 2005 E1671 Delområde 13 Stöd till säkerhet och beredskap Delområde 2 Författare/redaktör Projektledare Johannes Malminen Johannes Malminen Email: [email protected] Godkänd av Jan-Erik Rendahl Uppdragsgivare/kundbeteckning Krisberedskapsmyndigheten Tekniskt och/eller vetenskapligt ansvarig Johannes Malminen Rapportens titel (i översättning) Att hantera globala finansflöden: valmöjligheter och begränsningar i den svenska finanskrisen 1992 Sammanfattning (högst 200 ord) Avhandlingen analyserar globaliserade finansflödens påverkan på policyvalen i den svenska finanskrisen 1992. Syftet med avhandlingen är att förbättra förståelsen av hur globaliserade finansflöden påverkar statens policyval under en finanskris och bestämma i vilken omfattning staten fortfarande har valmöjligheter trots de begränsningar som globaliserade finansmarknader utgör. Studien fokuserar på de tre beslutssituationerna att försvara kronan, stödja bankerna och bildandet av en politisk koalition. Slutsatserna pekar på att beslutsfattarna i samtliga beslutssituationer väntade så länge som möjligt innan de fattade sina beslut. Policyvalen var reaktiva snarare än proaktiva. I ljuset av globala begränsningar på nationella policyval blev de beslut som fattades avgörande för att försvara de kvarvarande policyutrymmet i den svenska finanskrisen 1992. Nyckelord Sverige, finanskris, globalisering, globala finansflöden, krishantering, ekonomisk säkerhet, policy autonomi Övriga bibliografiska uppgifter Språk Engelska ISSN 1650-1942 Antal sidor: 237 s. Distribution enligt missiv Pris: Enligt prislista Contents List of Tables and Figures ........................................................................................................vi Preface........................................................................................................................................vii Acknowledgements ..................................................................................................................ix Abbreviations/Names..............................................................................................................xi Chapter 1: Managing the Consequences of Global Finance................................................. 1 Chapter 2: Globalization, the State, and the Financial Crisis in Sweden.......................... 16 Chapter 3: The Growth of Global Finance in Sweden......................................................... 34 Chapter 4: The Swedish Financial Crisis of 1992 ................................................................. 63 Chapter 5: Constrained Choice and Policymaking in the Swedish Financial Crisis ...... 89 Chapter 6: Global Constraints in the Swedish Financial Crisis ....................................... 113 Chapter 7: Policy Options and Choices in the Swedish Financial Crisis........................ 149 Chapter 8: Conclusion ........................................................................................................... 198 List of Interviews.................................................................................................................... 206 Bibliography............................................................................................................................ 207 List of Tables and Figures Table 1: Financial External Openness in the Nordic Countries .......................... 51 Figure 1: Swedish international investment position, 1985-2000 ......................... 59 Figure 2: Equity and debt securities as total of Swedish portfolio investment assets, 1985-2000..................................................................... 60 Figure