Latvian Meltdown: Sweden Gets €3bn
ECB lends Sweden €3bn
By Ralph Atkins in Frankfurt, Joshua Chaffin in Brussels,and Robert Anderson in Stockholm, June 11 2009 03:00
The European Central Bank has acted to head off a financial crisis in the Baltics, providing Sweden’s central bank with a €3bn loan in a confidence-boosting move amid growing fears over Latvia’s economy.
The ECB move signalled the central bank’s willingness to shore up official European help for countries such as Latvia, whose prime minister, Valdis Dombrovskis, voiced optimism that the country would soon receive another tranche of multi-national aid. The ECB’s loan to the Riksbank – a rare instance of aid for a country outside the eurozone – will be used to augment the Swedish central bank’s foreign reserves, increasing its capacity to help Sweden’s private-sector banks, which dominate the Baltic region’s financial sector.
Since the global financial crisis erupted, the ECB has been wary about extending help beyond the borders of the eurozone. Yesterday’s move suggested it was prepared to do that. Jean-Claude Trichet, ECB president, has been careful not to rule out stepping up help to the Baltic region, although such a move could prove controversial within the bank.
The €3bn being lent to the Riksbank is part of a previously undisclosed “swap” agreement, which was struck in December 2007 and allows the Swedish central bank to borrow up to €10bn in exchange for Swedish kronor for up to three months.
Last week, Mr Trichet revealed that it had an agreement allowing the Latvian central bank to obtain liquidity from the ECB, but only against euro-denominated collateral.
The ECB will worry about the financial risks and potential costs involved in stepping up to help for the Baltic countries, as well as the dangers of setting a precedent that might prove awkward in a future crisis in eastern Europe or elsewhere.
The Latvian lat has stabilised this week, boosting sentiment towards other eastern European currencies, after Riga said it had found another 500m lats in budget savings. This has raised hopes the International Monetary Fund will soon approve the next €1.4bn tranche of aid under Latvia’s stabilisation plan.
“This gives us certainty about the next tranche,” said Kristins Strazds, head of trading at SEB bank in Riga. “This should end the devaluation rumours in the short term.” However, Joaquin Almunia, European economic affairs commissioner, stressed in Brussels the need for Latvia to sustain its budget cuts over the long term.
Mr Almunia was speaking after a meeting with Mr Dombrovskis, who expressed confidence that Latvia’s parliament would next week approve the emergency budget cuts. Riga was now turning its attention to medium-term initiatives that would lower the deficit below 3 per cent of gross domestic product, Mr Dombrovskis said.
Earlier, Mr Dombrovskis told the Financial Times that the situation was beginning to stabilise. “It’s important … that people know that we will continue to receive this international loan package.”