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Transferring Swedish bank risk onto Latvian taxpayers

This is my translation of an article from Dagens Nyheter, a Swedish daily.

Swedish banks are planning to write down Latvian personal loans by 10 percent. However, the proposal includes only a small part of the Latvia’s mountain of debt.

The criteria for qualifying for the program, as it stands right now, is quite strict. So there is nothing which will include a very large number of private individuals in Latvia, "said Swedbank Director Thomas Backteman to TT.

On Wednesday, Latvian Prime Minister Valdis Dombrovskis on Latvian radio told of new plans to support indebted individuals.

He said that the program is based on "a certain solidarity" from the banks in the country, which are to write down the debt of the people who qualify for assistance.

But according to Thomas Backteman, the proposal comes from the banks themselves. The Latvian Banking Association has been having a discussion with the Government of Latvia on a way to restructure of private debts.

The Bankers’ Association made a proposal to provide a moratorium, that is, a temporary deferral, in the case of payments on debts to private persons.

And for those who give this concession, the state will step in and guarantee the debt. “Then we will write down the debt by 10 percent," he says.

Swedbank and SEB are the two banks with the most loan customers in Latvia. Like SEB Swedbank estimates that the economic impact of the proposal will be small:

"Our current assessment is that only a small part of SEB’s loans to households would be covered," writes Elisabeth Lennhede, press officer at the bank, in an email to TT.

And even if the debts are written down, the program would probably also mean that banks would forgo a small part of the massive credit losses that are expected to arise in Latvia in the coming years.

That’s how it is, and above all, we get a guarantee, "says Thomas Backteman.

It sounds like a transfer of risk from Swedish banks to Latvian taxpayers if you asked me.

Lettiska skulder ska skrivas ned – Dagens Nyheter

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

6 Comments

  1. aitrader says:

    Bankföreningen har kommit med ett förslag som innebär att man ska ge ett moratorium, det vill säga en tillfällig eftergift, när det gäller amorteringar på skulderna till privatpersoner.

    You translated this as:

    The Bankers’ Association made a proposal to provide a moratorium, that is, a temporary deferral, in the case of payments on debts to private persons.

    I would translate this a bit differently:

    The Bankers’ Association made a proposal to provide a moratorium, that is, a temporary concession, in the case of amortizing loan payments on debts to private persons.

    In other words the loan holders will be able to make interest-only payments for a time but the loan amounts will remain unchanged.

    This article seems to be based on loose babble between Swedish banks, who still think they will be able to collect their money, and the Latvian government, who still think they can avoid devaluing their currency. (Or think they can avoid devaluing it until after they receive the IMF loans).

    What the Swedish banks seem to be after is a Latvian government guarantee of their loans, and I assume this would be drawn from IMF loans to Latvia, in return for a temporary suspension of loan amortization payments in lieue of interest-only payments for a period of time.

    As an expat yank living in Sweden I can say that my experience here is that the business acumen, particularly in the banking sector, is quite low when compared to countries like the UK, Canada, and the USA. Swedish banks do not understand the reality facing them. They still believe that someone ‘must’ come to their rescue. Their first attempt, as shown in the article quoted, is to go after IMF loans to the Latvian government via a Latvian government guarantee. The backup position is the $100 billion IMF credit line sought recently by the Swedish government as a backstop for SEB and Swedbank.

    Unfortunatley the losses these banks are about to experience dwarfs this amount and no amount of Latvian or Swedish government guarantees will change this. Head-in-the-sand is business as usual in these little Scandinavian contries. One would think Sweden would have learned from the result of their Icelandic cousins’ recent experiences. Such is unfortunately not the case.

    • Good comments yet again. I agree that this is just a giveaway to Swedish banks who are trying to convince us that their exposure in Latvia is not large. Let’s not forget Estonia and Lithuania as well. What I find striking in this story is the degree to which most banking systems have captured politicians. This is the exact same type of thing now ongoing in the U.S.

      As for the transfer of risk to the IMF, we are assuming the IMF steps in for Latvia. Really, it is the taxpayer who is on the hook here because Latvia is socializing losses that Swedish banks would have taken.