STOCKHOLM (Reuters) ? A property bubble, banks near collapse, a currency under pressure and the future of a cushy European social welfare state in question.
This is not Europe 2012 but Sweden 1992. And Bo Lundgren, the fast-talking politician and financial official known as "Mr. Fix It," who then helped rescue Sweden from its worst crisis since the 1930s, says history lessons are being forgotten.
Quick moves over failing banks, including nationalization and blanket debt guarantees, helped ease a financial crunch. It proved so successful that Lundgren has found himself testifying to the U.S. Congress on the model.
It was also mixed with cautious austerity that Lundgren says avoided the "fiscal trap" facing many European nations in 2012, combined with deep structural reforms and unified political leadership that secured Sweden's economic health for years.
"With luck, and to some extent understanding the situation, we didn't make the mistakes you can see in Europe today ... believing too much in austerity," said Lundgren, who was minister for fiscal and financial affairs from 1991 to 1994 and who now heads Sweden's Debt Office.
From a welfare basket case, Sweden emerged from its crisis as one of Europe's soundest economies - its public debt halving to around 40 percent of GDP since the crisis. It weathered a 2008-09 global crunch in part due to this trauma 20 years ago.
There are major differences - perhaps the most important being Sweden's ability to devalue its currency to boost its export economy - a tool unavailable for countries like Greece.
But Sweden avoided the political conflicts over austerity that Greece now faces and steered clear of the fiscal trap that has led to fears that countries like Spain will be plunged into a spiral of spending cuts, falling revenues and rising debt.
By 1992, years of deregulation of credit markets had led to a property bubble in Sweden. With house prices rising, people were refinancing their mortgages to renovate, or buying boats to sail at the weekends on Stockholm's archipelago.
Officials paint a picture of a nation at first in denial. Like the United States later, few predicted how much a housing squeeze would spark fires in the rest of the financial system.
"I would get phone calls from Riksbank (central bank) officials and very senior politicians who just did not understand what was happening," said Knut Hallberg, an economist at Swedbank who worked in the finance ministry in the crisis.
When that bubble burst, it sparked a credit crunch. At one point overnight interest rates rose to 500 percent as the central bank tried to defend a peg of the crown against the German mark. The peg was eventually abandoned and the crown sank.
The economy contracted by its worst rate since the 1930s. Banks, on average, lost about 20 percent of their balance sheets. Unemployment rose to 12 percent.
Arne Karlsson, CEO of Swedish private equity firm Ratos, said five people he knew committed suicide. He believes any more austerity would have made things even worse.
"We had a very non-Swedish situation at the time," he said. "We had a true depression."
For many, it showed how the Nordic region's biggest economy would be unable to support a cradle-to-grave welfare state that had hit public finance and discouraged productivity and investment.
Several small government austerity packages tried to paper over the cracks, but failed.
Realizing that this was no ordinary crisis, the government soon extended guarantees to all bank liabilities. Two of Sweden's biggest banks were nationalized, part of government intervention that would cost 4-5 percent of GDP.
It was also a sign of how Sweden rose above party ideology in a crisis. This was no socialist government, but a right of centre coalition -- the same coalition that is in power today.
"As you know I am a market-economy, right-wing politician. But I still believe you can go in and take over the bank for a short while," Prime Minister Fredrik Reinfeldt told Reuters.
"If they want us to cover their losses, we should also be part of the game. If you want our money we will take shares from you," he added. "This is exactly what we learnt in the 1990s. We did it again in 2008-2009."
In 1992, the government even made private banks pay back government consultancy fees.
What's done is done -- and Lundgren says Europe missed an opportunity a year ago in not guaranteeing future loans, and nationalizing some failing banks.
He says the more immediate lesson for the Europe of 2012 was Sweden's caution over fiscal austerity. While it was painful - some 5 to 6 percent of GDP - it was spread over several years and combined with structural reforms that would soon help Sweden find lasting long-term growth.
Hans Tson Soderstrom, professor at the Stockholm School of Economics, was invited by the authorities to meet IMF missions who flew in to Stockholm demanding austerity.
"We had shouting matches. The IMF just didn't see the risks of too much austerity," he said. "After a while they didn't invite me back to these meetings."
After the crisis, consumers began to repay debts. The domestic savings ratio was -8 percent of GDP before the crisis, but by 1993 it was +12 percent, a shift of a fifth of GDP.
A January report by the McKinsey Global Institute says Sweden's banking measures were critical to kick-start lending. It warned cutting spending too aggressively can slow recovery, as happened in Finland in 1992 amid private debt deleveraging.
"We started out with some kind of rather mild austerity measures," Lundgren said. "Instinctively we understood that you couldn't do so much when you have this phase of the private sector debt consolidation."
"Austerity measures would then only add to the problems we had. You cannot go to markets and say we are doing austerity measures, 'Hey, please lower long-term yields',"
Included in the Swedish austerity moves were cuts in housing subsidies that amounted to 2 percent of GDP and reductions in grants for the unemployed. Energy taxes were indexed.
When Lundgren was forced to raise revenues, he refused to raise tax rates but instead closed loopholes, such as tax deductions.
For Carl Bildt, who was prime minister during the crisis and is now the country's foreign minister, the lesson was using the opportunity to pass structural reforms with a long-term effect.
"Without the devaluation we would have got the same result, but more slowly," he said.
"But it was the structural reforms that led to Sweden's long-term health," he added, referring to polices like abolishing housing subsidies and deregulating telecommunications.
Political unity also helped. The first sentence of the government press release announcing the rescue of the banks made it clear it was an agreement signed with the opposition.
Minority coalition partners and the opposition were generally in accord, despite knowing it was political suicide.
"I remember the last government meeting we had," recounted Lundgren. "The Centre Party labor market minister said 'Is there any group in society which we have not made into an enemy yet'?
"It was very tough."
Austerity continued after the centre-right coalition lost power in 1994 to the Social Democrats. Despite being the founders of the welfare stare, the party also launched austerity packages amounting to around 5 percent of GDP.
"In the four Nordic countries, there is political consensus," said Christian Clausen, chief executive of Nordea, the Nordic region's biggest bank, and also the head of the European Banking Federation.
"Consensus means that there is a common accepted discipline around financial policies and how to run the economy."
There are obvious differences - Sweden was a small country in a growing global economy that could effectively devalue its currency. A roughly 25 percent devaluation boosted exports and employment - something euro zone economies like Greece cannot do.
"We have to be honest and recognize that we benefited from a weaker currency and global growth helped our manufacturing," said Hallberg. He says structural reforms were crucial not only for helping Sweden grow, but also for convincing markets.
Devaluation is not an option for euro zone members, Hallberg said. "They have to emphasize structural reforms. There are no quick fixes. With markets you have to buy time and structural reforms help that," he added.
Those reforms mean Sweden was well-placed to deal with the latest crunch. Before the 2008-2009 downturn, Sweden was running a budget surplus of more than 3 percent of GDP.
Lundgren was much in demand as a speaker in 2009 as the banking crunch hit, including to Congress. He feels Europe still needs to learn from the lesson of Sweden.
"You will never be successful in hitting exactly the right balance, but obviously you have to understand there is a question of balancing austerity with growth."
"Everyone is saying the banks are the cause of this crisis. That is not true, it's political leadership."
(Additional reporting by Johan Sennero and Mia Shanley, editing by Peter Millership)