Another day, another Latvia development.
Although, as Danske Bank note, it’s getting harder to determine what’s really going on the ground. From their report on Tuesday:
Most recently, it seems Latvia’s prime minister has decided to change the sums lenders can collect on outstanding mortgages to better reflect the current market value of the properties. As Reuters reported on Tuesday:
The government said in a statement on Tuesday that Prime Minister Valdis Dombrovskis had asked the state chancellery legal department to prepare amendments so that a borrower’s “liability to a lender connected with the purchase of a sole home is limited to the value of the collateral”.
The amendments are also to cover debt recovery on other assets and to stop banks from chasing guarantors on loans for the any debt left after the property or other asset had been sold.
Which, to the uninitiated, might suggest a certain disrespect for contract law - and hence for the very foundations of a viable open market system.
Of course, it does make sense that Latvia should opt for this over devaluation; a break from the euro peg at this point is hardly worth it. Plus, the move to amend the terms on liabilities would make it unnecessary. The damage, as they say, is done.
The big question is, could this actually be worse for the country - as well as the lenders involved - in the long run?
Danske Bank, for one, suggests it may be (our emphasis):
Where does this leave the banks active in Latvia? In a very bad position. With property prices down some 70% from the peak, it must be tempting to stop paying mortgage loans for borrowers with negative equity, which applies to the majority of mortgage borrowers in Latvia today. The major advantage from the Latvian government’s point of view is that devaluation will no longer pose a big problem! The major obstacle has been the fact that loans are made out in EUR, but collateral has been in LVL, and thus a devaluation would make loans increase substantially relative to the value of the collateral (i.e. real estate). This issue would be removed since the value of loans can never exceed the value of the LVL-denominated collateral, and all mortgage loans implicitly would be in LVL.
So why now?
According to Danske Bank, it might be a last ditch attempt to convince the IMF and the EU to stick with Latvia. As the analysts conclude:
This proposal could be a part of the political bargaining with IMF/EU. Everything might be solved overnight if a compromise can be reached, but the risk premium on Latvian banking business is sky-rocketing at the moment. The ramifications of this proposal lest 50% or more of all mortgage loans are covered by the proposal could be very severe for especially Swedbank and SEB. EUR/SEK is no doubt vulnerable to this growing tension, as is the mortgage bond spreads of especially Spintab bonds.Those negative ramifications on Swedbank and SEB, by the way, have seen the Swedish Krona react like this versus the euro on the day:
At the time of publishing, Swedbank shares were down nearly 9 per cent in Frankfurt - where share prices are expressed in euro terms - and up almost 3 per cent in Stockholm - where they are expressed in SEK terms.
Related links:
Defcon Latvia, again - FT Alphaville
Latvia’s not for turning - FT Alphaville
Swedbank sweats - FT Alphaville
