Looming devaluation

Bloomberg

"We feel comfortable about our action preparedness regardless of which way the Latvian government chooses to go," Wolf wrote in a statement late Thursday.

Latvia’s central bank pledged to defend its currency’s peg to the euro Thursday after some investors shunned assets linked to the Baltic nation on concern its economic collapse will precipitate a devaluation of the lats. Latvia is in the midst of the severest recession in the European Union.

The "challenges" for the Latvian population will be "substantial" and Swedbank’s customers’ payment capacity will be "under pressure" Swedbank said in the statement.

Latvia plans to cut spending and implement reforms that include closing some hospitals and schools so it can receive transfers from a 7.5 billion-euro ($10.6 billion) loan from a group led by the European Commission, the International Monetary Fund and Sweden. The IMF delayed a 200 million-euro transfer in March when the budget was not cut.

Swedish banks including Swedbank, SEB and Nordea made many loans in Latvia in euros, while customers in the country earn wages in the local currency. A devaluation would make it harder for many Latvians to repay debt.