Dec. 17 (Bloomberg) – Sweden’s pony-tailed Finance Minister Anders Borg strode into his ministerial library with an urgent demand for cash on behalf of its Baltic neighbor, Latvia.
“We expect contributions from the International Monetary Fund and the World Bank,” Borg, 40, said at a hastily announced press conference on Dec. 10. The 27-member European Union would also have to “accept its responsibilities,” he added.
Any contribution to the bailout package may reduce the bill faced by Swedish taxpayers, whose assistance has already been pledged by Borg. Sweden’s banks are the biggest lenders in Latvia, once the fastest-growing economy in the EU. In the third quarter, it became the fastest-shrinking.
Two days after Borg’s plea, Chief Executive Officer Herbert Stepic of Austria’s Raiffeisen International Bank Holding AG, which operates in 17 central and east European countries, made a similar appeal, telling Der Standard newspaper that the EU must “put together” 40 billion euros ($55 billion) to 50 billion euros in “bank aid for the East.” The comments were confirmed by Raiffeisen International spokesman Martin Schreiber.
The IMF will announce details of its financial bailout for Latvia “in a few days,” the fund’s mission chief said yesterday. The Baltic country faces a “very painful adjustment” and needs to reverse its wage growth, said Christoph Rosenberg.
Lured to the region by proximity, ties of history and undeveloped financial markets, Swedish and Austrian banks took over local lenders across the Baltic states and the rest of former Soviet-occupied Europe. Now bad loan rates are soaring.
Swedbank AB says loan losses in the Baltic states are running 14 times higher than in its home market. Bad debt at Raiffeisen International climbed 85 percent in the third quarter.
‘Possible Contagion’
This involvement has driven political interest from ministers like Borg, a former economist at SEB AB, the second- biggest bank in the Baltic states.
“Sweden has a bigger business interest in Latvia than any other country in the world,” said Morten Hansen, who heads the economics department at the Stockholm School of Economics in Latvia’s capital, Riga. “If Latvia’s economy should get into further trouble, there could be contagion and it could spread to Estonia and Lithuania.”
Hansen’s concern for central and eastern Europe echoes Nobel Prize-winning economist Paul Krugman. “There is a burgeoning economic crisis in the European periphery,” Krugman said on the ABC network Dec. 14. “The money has dried up. That’s the new center, the center of this crisis has moved from the U.S. housing market to the European periphery.”
Risky Baltics
This could prove costly for west European states with the biggest exposure to the region. Latvia initially said it sought 3 billion euros in international aid. That figure is now as much as 5 billion euros, according to the Latvian finance ministry.
In addition, on Oct. 20 Sweden announced a $190 billion loan guarantee plan for banks, who say their riskiest loans are in the three Baltic states. Sweden’s regulator has stress-tested its lenders for Baltic loan losses as high as 8 percent. In that case, Swedbank alone could face 16 billion kronor ($1.97 billion) of losses on its 200 billion kronor Baltic loan book.
The Stockholm-based bank’s shares have plunged 73 percent so far this year, while SEB has slumped 64 percent. Svenska Handelsbanken AB, the only Swedish bank without a significant presence in the Baltic states, has dropped 37 percent.
Swedbank bought a stake in Estonia’s Hansabank in 1998 and took full control in 2005. SEB, which lost the battle for control over Hansabank, bought stakes in Estonia’s Eesti Uhispank, Latvia’s Latvijas Unibanka and Lithuania’s Vilniaus Bankas in 1998 and took full control of the lenders in 2000.
Foreign Forays
These foreign forays now face criticism. “Swedbank has made a huge amount of money in the Baltics, but it has happened through an enormous credit expansion,” said Tore Liedholm of the Swedish Shareholders’ Association. “It’s a catastrophe.”
It’s a long way from the “Swedish Golden Age,” the era in the early 1600s when Sweden’s King Gustavus Adolphus II conquered Riga. During his reign, the authorities built a university, schools and introduced political reforms, including improvements in the life of the serfs.
Sweden’s rule in Latvia was “the best occupation we’ve ever had,” said Roberts Safonovs, 21, a Latvian student. He’s started an online petition, signed by more than 5,000 people, asking Sweden to resume control of Latvia. “I have really lost trust in the Latvian government and the petition is a protest against them.”
Riga now has the fastest falling property prices in the world, according to London-based real estate brokerage Knight Frank LLP. According to Aleksandrs Cakste, a hotel owner in Riga and great great-grandson of Latvia’s first president, his country looks to Sweden for help.
“Sweden has been a great help, and Swedish banks established our banking system. They helped build the modern Latvia,” he said. “It’s not just self-interest,” he added. “The Swedes don’t want to see Latvia go down.”
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