Latvia issues warning to Swedish banks
28.12.2009, 11:58The Financial Times writes that Latvia’s prime minister has warned Swedish banks they risk choking off recovery in the Baltic state’s crisis-hit economy unless they resume lending.
Banks such as Swedbank and SEB, which dominate the Latvian market, have reined in credit as they struggle to contain rising bad loans amid the deepest recession in the European Union.
“The ... abrupt stopping of credit is a very problematic issue,” said Valdis Dombrovskis, the prime minister. “We expect Swedish banks to start [lending] again.”
Mr Dombrovskis said the banks must share responsibility after they helped sow the seeds of crisis by lending “irresponsibly”. The economy has contracted by about 18 per cent this year after a long period of rapid growth was thrown into reverse by the global credit crunch.
“Of course you can say that Latvians were borrowing irresponsibly but to borrow irresponsibly you need someone to lend irresponsibly,” he said. “We had very easy credit in a very overheated economy. Now we have almost no credit in a very deep recession.”
Mr Dombrovskis warned that deep budget cuts agreed as part of a €7.5bn rescue package with the International Monetary Fund and the European Commission would increase economic pain in the short term. But he insisted the measures were crucial to fiscal stability.
He ruled out devaluation of the lat. While breaking the currency’s fixed exchange rate with the euro would help Latvia’s exporters, it would increase the burden of euro-denominated loans, which account for 85 per cent of lending, he said.
“We would not see much benefit from devaluation because we are a very small and open economy which means that any competitiveness gains we may get would be very short-lived,” he said. “We would redistribute wealth from pretty much all the population to a few exporters.”
His resistance to devaluation reflects a determination to keep alive hopes of joining the euro. Mr Dombrovskis said he was confident of reducing the budget deficit from 10 per cent this year to 3 per cent – the maximum allowed under euro entry rules – by 2012, paving the way for membership by 2014.
LInk to the original article: http://www.ft.com/cms/s/0/bceac44a-ef3d-11de-86c4-00144feab49a.html?nclick_check=1