Sweden prepares for financial collapse in Latvia and major bank losses at home

Submitted by Edward Harrison of Credit Writedowns

The following is my translation of a much-discussed article that appeared in Swedish daily Svenska Dagbladet at the weekend.  This information was being withheld from the public and leaked at an inopportune moment.

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.  In August, I asked “Why is Swedbank doing a second rights issue?.” Now we know.

This is the kind of thing that topples governments.

Secret meeting on the crisis in Latvian

Finance Minister Anders Borg has had secret talks with the major Swedish banks and warned of a near economic collapse in Latvia, Svenska Dagbladet has learned. A nightmare scenario for Swedbank and SEB.

Yesterday Anders Borg issued a stark warning to the Latvian Government that it must take its financial problems seriously.

The promised cuts must be implemented when the new Latvian budget is presented in late October, according to Finance Minister.

The international community’s patience is very limited, stressed Anders Borg at the summit of European finance ministers in Gothenburg where he hosts as the finance minister in Presidency.

His statement came after recent reports from Latvia on political divisions in the ongoing budget negotiations.

But for Swedish bank heads, Borg’s move came as no surprise. According to several independent sources, Anders Borg, over the last few weeks, has contacted the senior management of major banks and warned them of an acute political crisis in Latvia. This in turn can lead to both a devaluation and eventually a default. It is a kind of national bankruptcy, similar to what hit Iceland last fall.

In secret talks with Swedish banks, Anders Borg explained the growing pressure that exists within the International Monetary Fund (IMF) to force Latvia into a devaluation.

A collapse in Latvia would have serious implications for several major Swedish banks. With a devaluation the already high loan losses would explode overnight, especially because many Latvians have loans in euro, which would become significantly more expensive.

Swedbank has up to today lent 61 billion kroner to Latvian individuals and businesses. The figure for SEB is 40 billion, while Nordea has 30 billion in loans.

For Swedbank a possible devaluation would come at an especially poor time. The bank is currently in the middle of a second rights issue in which shareholders have been asked to put up 15 billion.

CEO Michael Wolf’s message to shareholders and customers has repeatedly been that the money would be used for offensive investments. To then have to deal with a severe national bankruptcy in one of its major markets and see new issue money disappear into a black hole would be a severe blow to the bank’s credibility.

That a serious crisis approaches in Latvia has already been flagged by Anders Borg in the budget he presented a few weeks ago. On page 99 he writes:

"Since it is difficult to safely assess Latvia’s ability to pay and with conditions for recovery, one cannot completely exclude the risk of a major default."

The background to the current situation is a crash in the Baltic economies. Latvia is just the worst hit. This year, the country’s GDP is to shrink by as much as 18 percent.

This led to a rescue package cobbled together at Christmas last year. The International Monetary Fund (IMF), the EU and the Nordic countries decided on payments totaling SEK 80 billion, of which Sweden accounts for 7 billion.

An essential condition for aid money, however, is that Latvia implement substantial cuts in order to get the economy in balance.

This means wage cuts for state employees in over 15 percent, including hospital closures and major tax increases.

In July of last year Latvia went to reduce their spending for next year’s budget by more than 7.5 billion crowns.  It opened the door to  a further one billion disbursements from the IMF and the EU.

But then, the domestic political situation deteriorated. The previous Latvian government fell in February and since then the country has been governed by a coalition of five parties. The Prime Minister is Valdis Dombrovskis.  Next year come elections again.

Two of the parties in this five-party coalition have now objected to the previously announced savings of 7.5 billion. Some want to go back on parts of the promise and believe that a reasonable savings is instead about 4 billion kroner.

The goal to save 500 million lats (7.5 billion kroner) is practically impossible to achieve without eliminating several parts of the economy, Vents Armands Krauklis from the influential Liberal Party, which sits in the government coalition, said the day before yesterday.

24 hours later came the response from the EU.

"Latvia does not have much room for maneuver; It must fulfill its letter-of intent," said Anders Borg yesterday in Gothenburg to the news agency Direkt.

Original Source

Hemligt möte om lettisk kris – Svenska Dagblaget

Also see my August post, “Zombie banks Scandinavian edition and the threat of too big to fail.” This problem looms even larger now.

Update 7 Oct 2009: minor translation corrections were made resulting from reader suggestion.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward http://www.creditwritedowns.com


  1. rkka

    True, they can’t. And that won’t stop them.

    Expect heat, creativity, and economy with facts.

  2. Andris

    The geopolitical landscape is changing in the Baltics. This is the precise reason of the fuss really.
    You know, Swedes have been especially double-faced-eels towards the Baltics – scaremongering up the possibility of devaluation and at the same time stashing huge sums of cash euros to buy up whatever value property appears.
    Wanna details?

  3. kevinearick

    They have one shot left. There are only
    45 million people currently operating in
    the new economy. If they empty the
    reserve stimulus into existing channels,
    it will be all over but the crying.

    Ignorance is contagious on its own, and
    they have been breeding ignorance for
    several generations now (George Washington
    and the cherry tree, c’mon).

    They have to reverse breeding, do it
    while others are biting at their
    heels, on a global communication stage,
    and, oh by the way, they have to release
    a bunch of pissed off convicts, in a world
    where there is nowhere to hide.

    It’s a bit of a problem.



  4. Chris

    I would be quite leery of rushing in on this. There have been a number of apocalyptic-type forecasts over the last year on European banks, the Euro, the Euro-zone, Germany, Switzerland, Austria, Hungary, Poland, Latvia, probably ones I’m forgetting, too. No one bothers to explain what happens to the forecasts with the passage of time.

    This news story, would, I think, reflect political rather than financial develoments, per se. With Bush’s “missile defense” issue seemingly ‘settled’, there ought to be concomitant political ramifications affecting relations between Germany, Poland and the Baltic States, Czechoslovakia and Russia. The EU report on Georgia last week, I think, points in this direction.

    The “hot one” remains Ukraine, much more than any of the others, for reasons that ought to be obvious, and thus the upcoming elections. Ukraine is what some may think of as the last bastion of Rumsfield’s “New Europe.” Don’t be surprised to find that the new President of the EU turns out to be Polish, probably with ties to the pro-labor part of the Catholic church. This will have an effect on Latvia, Estonia and Lithuania, I would think.

    People tend to focus on the inability to name a replacment for the dollar as evidence that there is none. They neglect “arrangements” in trade, investment and many other activities which can be carried on outside the dollar trading pits. There is an extensive research literature on Japan’s foreign trade in the 1960’s which indicates ways these things can be done. Such “under the radar” arrangements might indicate why some of the anticipated collapses over the last year didn’t happen, and why Sweden would have no problem “adjusting” away from the US and the British, and back to its more traditional role with Poland and Germany.

  5. Swedish Lex

    The exposure of SEB and Swedbank in Latvia is outrageous. I hope Borg will be as harsh with the Swedish owners of the banks as he is with the Latvians. I have difficulties seeing Swedes accepting 15% wage cuts AND increased taxes under any circumstances.

  6. Borg

    We are Borg. You will be assimilated. Resistance is futile.

    (sorry, I just simply couldn’t resist :-)

  7. Peripheral Visionary

    Thanks Edward, I think this is an important story. There have, as Chris notes, been repeated warnings on Eastern Europe and the Baltics, but that is simply because the situation there has been festering for more than a year without any resolution. The delinquent loans will not go away on their own, and until there is a resolution regime for the Swedish banks and/or a miraculous infusion of massive amounts of capital into the Baltics, the risk of a meltdown will be there.

    This is particularly acute due to the fact that the Scandinavian banks receive much of their funding overseas. If the purchasers of Swedish banking paper overseas, particularly in the U.S. money markets, get cold feet and end the flow of funding, a crisis could develop in very short order. It may not take a full meltdown in Latvia to trigger a crisis. The situation remains very high risk.

  8. ferridder

    “statskonkurs” = “national bankrupcy”, not “state of bankrupcy”
    “genomföra” = “implement”, not “find”
    “tvärniten” = “the crash stop”, not “terrible”.
    “including hospitals” => “including hospital closures”

    The final comment of Anders Borg:
    “Actually, Latvia does not have very much room for manouver: they must fulfill their letter of intent.”

    1. Edward Harrison Post author

      also ‘stenhart?’ My brain couldn’t come up with the right idiom in English so I did a literal translation “rock hard.” Any suggestions are appreciated.

      1. ferridder

        The meaning is “mandatory”, though “essential” works fine. The language used in the article is fairly colloquial.

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