Edward Hugh over at A Fistful of Euros draws our attention to the following warning over the Baltic region issued by Danske Bank on Thursday:
The event risk has risen sharply in the Baltic markets and we advise outmost caution. Yesterday, the Swedish central bank Riksbanken said it will increase its currency reserve by SEK 100 bn through a loan from the Swedish debt agency. Investors seem to believe that this is a buffer to deal with potential problems arising from the Baltic crisis.
The big fears are mainly focused on Latvia, which following a disastrous Q1 GDP reading of -18 per cent is literally teetering on the edge, according to some commentators. Hugh offers some more context:
Swedish banks have claims in Latvia, Lithuania and Estonia amounting to about $75 billion, according to ING Groep NV, with SEB, Swedbank and Nordea accounting for 53 percent of Latvia’s lending market. Sweden’s central bank raised the amount of euros available for the Latvian central bank to swap for lats to 500 million euros ($670 million) at the start of May. Latvia’s central bank first entered the swap agreement with both its Swedish and Danish counterparts to borrow as much as 500 million euros for lats last December. The Riksbank was to provide 375 million euros and the Danish central bank the remainder.
Latvia has already spent over 500 million euros buying lats this year to support the currency.
Certainly, investors remain very jittery over Sweden’s potential exposure to currency devaluations in Baltic. Shares in both Swedbank and Skandinaviska Enskilda Banken fell sharply on Thursday as the market widely interpreted the Riksbank’s move to rebuild currency reserves as a signal it may be preparing to inject liquidity into commercial lenders.
But while prospective Baltic devaluations may already be having far-reaching effects on Swedish lenders operating in the region, the wider implications: eg. those that a Baltic state could very realistically default some time soon, should now really begin registering as a possibility among investors.
Just how a green-shoot obsessed market would react to such a piece of news is the big question.
Related links:
The Eastern European carry-trade meltdown, reviewed – FT Alphaville
Estonia, nul points - FT Alphaville
Emerging market credit fundamentals deteriorating, S&P says - FT Alphaville