A New Twist in Latvian Banking Policy

This FT article reports an interesting development in Latvian policy, where the interplay with foreign-owned banks and currency policy are important features.

11 replies on “A New Twist in Latvian Banking Policy”

@ Philip

can’t see how this would be legal. Essentially re-writing contracts that could have been signed 5 years ago. Would absolutely hammer the Swedish banks operating in Latvia.

Credit Writedowns has an interesting piece on Latvia and the legality of Swedish Banks’ rights issues.

“Note that the Swedish government has secretly been preparing the banks for financial Armageddon, encouraging Swedbank into a rights issue which arguably was conducted under fraudulent pretenses – very reminiscent of Bank of America’s shareholder vote for the merger with Merrill Lynch.”


Latvia is in meltdown – and same old story in that Swedish bank losses are being socialized at expense af future Latvian citizen/tax payers. Some 20 year learning curve for the Baltic States ………. might have to put the more significant insights of Marx back on their curricula ………

People don’t realise how close the Nordic countries are to a major crisis, which will dwarf Ireland’s. In Ireland, the banks have lent heavily to houseowners in Ireland. Over the past two years, house prices in Ireland have fallen by around 1% a month. Hence, mega-problems for the banks, but at least the decline has been gradual, month-by-month. In the Nordic countries, the banks have lent heavily to their near-neighbour Baltic countries. So far, they’ve been protected to some extent by the Baltic countries being persuaded not to devalue. But, this is at the the cost of their exports, manufacturing and GDP collapsing (GDP down 20 per cent). If the Baltic countries do have to devalue, there will be a mega-crisis in the Nordic countries. If, say, the Baltic countries devalued by 50%, that would be the equivalent for the Nordic countries’ banks of house and property prices in Ireland falling by 50% overnight.

Even as things stand, while the recession appears to be over in some countries, and bottoming-out in Ireland, in two of the three Nordic countries (Denmark and Finland), the recession is deepening. The EU released the figures for GDP in 2009 Q2 just today. Here they are;

change in GDP in Q2 compared with Q1:

[ 1] Slovakia +2.2%
[ 2] Slovenia +0.7%
[ 3] Poland +0.5%
[ 4] France +0.3%
[ 5] Germany +0.3%
[ 6] Portugal +0.3%
[ 7] Greece +0.2%
[ 8] Sweden +0.2%
[ 9] Czech Rep +0.1%
[10] IRELAND -0.0% <<<<
[11] Belgium -0.3%
[12] Cyprus -0.4%
[13] Austria -0.5%
[14] Italy -0.5%
[15] U. Kingdom -0.6%
[16] Latvia -0.8%
[17] Malta -0.9%
[18] Neth’lands -1.1%
[19] Spain -1.1%
[20] Romania -1.1%
[21] Hungary -2.0%
[22] Denmark -2.6%
[23] Finland -2.6%
[24] Estonia -3.4%
[25] Lithuania -9.8%

So, in Denmark and Finland, the recession is intensifying. If the Baltic countries have to devalue, things will get much worse in those two countries, and Sweden will follow suit. If Paddy Power took bets on these things, I’d wager 50 euros that the first country to exit the Eurozone will not be Ireland, Spain, Italy or Greece, but Finland, although probably not for a few years. I’m sure I’d get great odds, and it would be a good long-term bet. Finland’s GDP is allready down 8.9% y-o-y and their exports are down 35%, and that is before any ramifications in the Nordic countries generally, resulting from large devaluations by the Baltic countries.

Anders Borg the Swedish Finance Minister has already advised the Swedish banks that the Latvian gov’t is in disarray and a collapse is imminent. The three largest Swedish banks are owed Kroner 131 billion by Latvian individuals. The only question to be answered is will it be a 50% hit or a 66.6% hit.

I think a Latvian devaluation is a given now. The initial reaction to the proposal to protect home-owners in negative equity was seen as a method to ease the need for a devaluation, but on ‘mature reflection’ it seems that it is to prepare for devaluation.

If a Latvian has a foreign currency mortgage (as many do – how did that ever seem like a good idea??) then a repayment cap will politically be very important if there is going to be a large devaluation.

In order to protect the ordinary Latvian from the very worst effects of the devaluation, the government will have to get their ducks in a line and capping mortgage payments based on the local-currency value of property is a good place to start.

In other Latvian news, a government debt auction failed today, with investors only picking up 2m of the 24m Lats worth of debt on offer.

With the IMF set to walk away from the country we are, to my mind, within days of a devaluation.

And Austria has similar problems with the old empire countries borrowing in euro from its banks.
The ECB was asleep at the wheel? Was it as simple as the member country CB thinking that the ECB would warn it and vice versa? I wonder if they spoke at all?
If Nama was demanded by the ECB, the force of that demand has dissipated somewhat with these events?

@ David O’D

“and same old story in that Swedish bank losses are being socialized at expense of future Latvian citizen/tax payers”

i dont see how Swedish losses are being socialised in this situation. When they granted the loans, there was full recourse on them against the borrower. The Swedish banks, much like here, could hold the debt over the borrower beyond the sale of the house itself. It’s the Latvian government which is seeking to change the rules. This isn’t a story about socialisation of losses, but a very clear story of a government trying to legislate it citizens out of existing contracts which they knowingly entered into.

A devaluation has been the likeliest outcome for a long time. If the EU wanted to avoid such an outcome it should have offered Latvia immediate Euro membership. How bad a failure of EU crisis management will this eventually be seen to be, if devaluation does indeed happen? Only time will tell.

That depends on who gets hurt. If Austria survives, but Sweden hurts, then presumably Sweden would have been better off in the warm bosom of the euro too…

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