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Latvia mulling IMF loan as crisis sweeps Nordic region

Latvia has been forced to bail out its second largest bank over the weekend and may soon need a rescue by the International Monetary Fund as the financial crisis engulfs the Baltic region, and much of Scandinanvia.

By Ambrose Evans-Pritchard
Last Updated: 8:17AM GMT 10 Nov 2008
Telegraph

Premier Ivars Godmanis stunned the country by announcing that Parex banka had been half-nationalised in an attempt to head off a serious crisis in the face of escalating capital flight from the country.

"We have to do everything to avoid trouble, not only for specific banks, but for the banking system as a whole," he said.

Mr Godmanis said Latvia was examining a raft of measures to rescue the economy, including possible aid from the IMF and European Union. Iceland, Hungary, and Ukraine have already obtained loans for the IMF.

Latvia is facing a brutal recession after years of torrid credit growth and one of the most extreme property bubbles in Eastern Europe. The economy contracted by 4.2pc in the third quarter.

House prices have fallen 21pc over the last year, according to Global Property Guide. The swing from boom to bust has been made worse by heavy use of mortgages in euros, Swiss francs, and yen.

The rating agencies have rushed through a spate of downgrades in recent days for the Baltic trio of Latvia, Estonia, and Lithuania, warning that heavily reliance on short-term foreign funding has left them dangerously exposed to the global squeeze.

"If the situation were to worsen, Latvia could be forced to seek balance-of-payments support from the EU or the International Monetary Fund," said Kenneth Orchard, senior analyst at Moody's

"The global liquidity crisis will probably cause a shock to the Latvian banking system, which will reverberate throughout the rest of the economy. Unless there are major improvements in the European syndicated loan market by early 2009, the government will be forced to take remedial action."

Oskars Firmanus, head of the Latvian consultancy Paus Konsults, said the Parex rescue had badly shaken depositors in Riga. "It has come as a big surprise. The bank has been very secretive and did not tell anybody there was a problem. People have been lining on the streets over the weekends trying to get their money out of ATM machines," he said.

Swedish banks have large exposure to the Baltic market, adding to their woes as the industrial downturn hits Scandinavia.

The IMF warned in a recent report that the Baltic operations of Stockholm's banks "could cause a credit crunch in Sweden itself" if the closure of the wholesale capital markets continues for much longer. Total lending to Eastern Europe by Swedish banks is equal to 25pc of the country's GDP.

Swedbank dominates lending in Latvia and Estonia, while SEB is the biggest lender to Lithuania. The share price of the two banks have fallen by 70pc from their peak.

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