Latvia gets Nordic c.bank aid; IMF, EU coming soon
Dec 16 (Reuters) - Crisis-hit Latvia received access to 500 million euros ($683 million) in Swedish and Danish central bank loans on Tuesday while it waits for a full aid package from the IMF and European Union.
An IMF official said he expected an agreement soon and saw a painful adjustment ahead for the Baltic state.
The Swedish central bank said crisis in Latvia could hit the markets and economy in Sweden and neighbouring states.
“The bridging loans provided by Sweden and Denmark will support financial stability in Latvia until the IMF programme for Latvia has been decided on,” the Swedish central bank, the Riksbank, said in a statement.
Its action reflected concerns that Nordic groups such as Swedbank, SEB and Nordea, which are now market leaders in Latvia and the other Baltic states, could be hit if the regional crisis worsens. DNB NOR and Danske Bank are also active in the market .
Latvia appealed for aid as its economy slid into recession and it had to rescue its second-largest bank, Parex, the main locally owned bank that was competing with the Nordic banks and which is likely to benefit from the Swedish and Danish loans.
The central bank has also spent more than 1 billion euros to support the lat, which is pegged to the euro.
Christoph Rosenberg, head of the IMF mission pulling the aid package together, told reporters it would be ready in the “next few days” and then added, “before Christmas”.
“Latvia is at a turning point, the economy is slowing very rapidly, the global crisis has affected this country maybe more than other countries because of the vulnerabilities that were were built up during these unusual boom years,” he said.
“The country has to make some very painful adjustments.”
The government has forecast an economic contraction next year of 5 percent, a sharp contrast to double digit growth rates of recent years, which came on the back of a consumer boom.
SWEDISH, DANISH HELP
The Riksbank said its portion of the agreement with Denmark’s central bank to lend to Latvia via swap agreements in exchange for Latvian lats would be 375 million euros.
A Latvian central bank spokesman said some of the Nordic funds would be used to boost liquidity at Parex. Parex said in a statement it welcomed the Swedish and Danish decision.
The government has already lent Parex several hundred million lats after depositors rushed to take out cash.
The state took control of 85 percent of the bank and on Tuesday the government agreed a law to give it powers to take control of 100 percent of a bank by either agreeing a deal with minority shareholders or forcing them to sell.
The remaining 15 percent of Parex is owned by a range of small shareholders, with investment fund East Capital having the biggest single stake at four percent.
Newspaper Diena has said Sweden’s Handelsbanken sold its 0.3 percent stake in Parex for one euro cent.
The lat, which has been stuck at the 0.7098 weak end of its allowed 1 percent band against the euro, firmed by the end of the day to 0.7083/93, after the central bank loan news.