To spot the next financial crisis, look who was spared by the last one

COUNTRIES hard-hit by the financial crisis have spent much of the decade since trying to fix their banks.

Countries that escaped unscathed have done the exact opposite, going on a borrowing binge that makes them prime candidates to be victims of any credit squeeze resulting from rising US interest rates.

Leading the list are Australia, Canada and Sweden. They had all the benefits of the lowest global interest rates in history, without first suffering the economic meltdown and bank failures that led the US and Europe to take emergency action.

Having come through the Lehman crisis in good shape, lenders in the three countries have not learned the lesson pummeled into bank boards in other developed countries: Watch out for frothy housing markets and trouble in foreign-currency financing.

The pattern is familiar to any student of financial history. After a bout of financial excess, borrowers who lost out are leery of repeating their mistakes, while regulators clamp down on the dodgy practices that led to the last crisis. The next problem comes from the places, products or businesses that no one is worrying about.

It is not quite fair to say that no one is concerned this time. The Riksbank, Sweden’s central bank, is deeply concerned. It has been warning about the risks from the housing market, and worrying in public about the strength of its banks. It is in the unusual position among central banks of not having powers to limit lending – such macroprudential rules are set by the government. Canada has repeatedly tightened rules on banks, only for borrowers to turn to nonbanks. And a high-profile investigation is showing up problems in Australia.

None of this has fed through into higher rates or investors demanding significant action from banks, though.

Ian Harnett, chief investment strategist at Absolute Strategy Research in London, adds Norway and New Zealand to the three countries. Helped by a mix of commodities and exports to China they avoided the worst of the credit crunch in 2008-09, but still benefited from the low global rates that followed. “The result was they got the wrong price of capital,” he says.

Sweden offers a case study in financial crises: in the early 1990s its banking system had a catastrophe on the scale of Lehman when a housing bubble burst. All deposits were guaranteed by the government, at a cost of 4% of GDP – in return for which Sweden demanded stock in the banks, later sold.

It was the lesson of 1992 that kept the banks in check during the global boom of the 2000s and allowed Sweden to weather the crisis.