Latvia to receive central bank help

Financial Times.Com

Robert Anderson in Stockholm

December 17 2008



The central banks of Sweden and Denmark will lend Latvia up to €500m ($702m) to ease its banks’ liquidity problems until an International Monetary Fund stabilisation plan can be put in place.



The swap facility demonstrates the importance of Latvia to Sweden, whose banks dominate the Baltic country’s banking sector, as well as the seriousness and urgency of Latvia’s financial problems.



“There is also a risk that a financial crisis in Latvia could spread and create unease on the financial markets in Sweden and our neighbouring countries,” said Stefan Ingves, governor of Sweden’s Riksbank, which is contributing €375m of the swap facility. “Ultimately it could affect the payment system and the Swedish economy.”



Latvia was forced to seek international assistance last month after the government rescued Parex Banka, the country’s second largest bank, triggering pressure on the currency and raising fears that its exchange rate peg would not hold.

The government is seeking around €5bn from the IMF, the European Union and other international lenders to bolster its foreign currency reserves, fill a hole in the public finances and support struggling banks and companies.



Prime Minister Ivars Godmanis said he hoped to have the IMF deal finalised before Christmas after parliament passed a 1bn lat ($1.99bn) austerity package last week. Sweden, together with other Nordic and Baltic nations, is also expected to contribute to this rescue package. Swedbank and SEB of Sweden are heavily exposed to the Baltic states and would suffer big losses if Latvia were forced to abandon its currency peg, a move that could also trigger devaluations in neighbouring Estonia and Lithuania.



Latvijas Banka, Latvia’s central bank, said the swap facility could be used to boost its foreign reserves and to lend foreign currency to banks with liquidity problems.



“As the government wraps up its talks with the IMF and the EU we are making sure that we have enough funds in case we need it,” said Martins Gravitis, spokesman.



The central bank has been intervening to support the lat’s peg to the euro, though at a slower pace recently. It has spent some €1.1bn since the start of October, but it still had €3.3bn in foreign reserves at the end of November, enough to cover all the lats in circulation.



To help Parex, the government has already lent it 200m lats and put a further 154m lats on deposit. It is also negotiating with creditors to roll over €775m of syndicated loans due next year. Bank executives have indicated that further substantial help will be needed.



The European Bank for Reconstruction and Development said this week that it was “strongly committed” to help stabilise the Latvian banking sector.



“The EBRD is putting a particular focus on banks with systemic importance but without foreign strategic investors, including Parex Banka, and will work with them to review the possibility to strengthen balance sheets,” it said in a statement.

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