Sweden ’ready to act’ on Latvia rout

Bloomberg

Sweden’s banks are the Baltics’ biggest and Fitch Ratings estimates they face loan losses from the region that may cost Sweden 5 percent of gross domestic product to absorb. Latvia’s parliament Tuesday night passed budget cuts of $1 billion, equal to 10 percent of spending, to help unlock a 1.7 billion-euro ($2.4 billion) tranche from a group led by the European Commission and the International Monetary Fund.

While the budget cuts will keep loan funds flowing and avert a lats devaluation, they will exacerbate Latvia’s recessions, the European Union’s steepest. Swedbank and SEB, the largest banks in the Baltics, have loaned more than 366 billion kronor ($48 billion) there, respectively 17 percent and 13 percent of total loans.

"If there would be credit losses that would undermine their capital, we’ve made clear that we are ready to provide capital for common stocks to safeguard the taxpayers’ interests and recapitalize the banks," Borg said. "If there would be huge losses we would be ready to take over banks. But the first responsibility lies with private owners."

Contraction of 18 percent

The economy of Latvia, which pegs the lats to the euro, contracted 18 percent in the first quarter. The budget includes pay cuts as deep as 20 percent and 10 percent pension reductions, undermining households’ and businesses’ ability to service debt.

Before passing the budget cuts, some investors were concerned Latvia may be forced to devalue the lats as a way to keep exports competitive and sustain its economy, in the absence of bailout funds.

Still, bank losses will be the same by "the end of the cycle," whether Latvia devalues or not, Fitch Ratings analyst Alexandre Birry said Tuesday.

"Our first principle is to safeguards taxpayers’ interests," Borg said. "Our second principle is to safeguard taxpayers’ interests and our third principle is to safeguard taxpayers’ interests. So we will not spend excessive money to bail out bank owners. We will deal with them in an appropriate manner."