DI: Sweden must pay for the party in the Baltics
20.01.2009, 13:33 SEB and Swedbank are now so dominant in the
Baltic credit markets that they de facto act as central banks in the region,
today’s Dagens Industri writes.
International ratings agency Standard Poor's noted this in the summer.
"As a result, it is the Scandinavian commercial banks rather than the
regional central banks are best placed to regulate the level of monetary
stimulus in the Baltic countries", said the S P report.
So how have SEB chief Annika Falk Grenville and Swedbank Jan Lidén handled
their duties as governors to Estonia, Latvia and Lithuania?
As the Baltic economies are today must be rated a resounding fail. What SEB
and Swedbank are doing is direct monetary policy mismanagement. They have
destabilized our neighboring countries economically and, by extension, perhaps
even politically.
The sharp increase in bank lending has not gone to building a competitive
business. An increasing share of lending has instead gone to fund the vast
private consumption. With reckless lending, Swedish banks have contributed for
Riga residents having more SUV’s per capita and higher prices per square meter
of housing than in Stockholm.
Stimulus has been reviewed in austerity.
"Latvia will be the next Argentina", warns last year's economics prize winner
Paul Krugman.
Like so many others failed governors have had to go, Falk Grenville and Lidén
will go to the International Monetary Fund, IMF, to save out of devaluation.
Shortly before Christmas, the IMF came out with an aid package for Latvia.
Together with the EU, the Nordic countries and some help with the IMF lent a
total of EUR 7.5 bln. If you want to draw parallels with Argentina, one is
unfortunately far from certainty that the rescue package is sufficient.
To get money, Latvia needs to implement tough austerity. It is about tax
increases and expenditure cuts in the corresponding 7 percent of its GDP.
Lenders require cutting wages of public employees and by extension also of
private employees.
The IMF notes that wages in Latvia have increased much faster than
productivity in recent years, which undermined the country's competitiveness and
made the Latvian currency over-valued. Like Argentina before the currency
collapse in 2002, Latvia has thus to choose between devaluation (reduced
currency) and deflation (wage) in order to restore competitiveness.
The government in Riga has chosen the latter path, trying to drive down
wages. The problem is that neither the devaluation nor deflation reduces the
value of the debt. Another similarity with Argentina is that Latvia's own
currency, song, used in parallel with a foreign currency.
SEB, Swedbank and the other banks in the Latvian market has left almost 90
percent of their household and corporate debt denominated in foreign currencies,
primarily the euro.
If Latvia devaluates - that is, write up the value of the euro in relation to
latency - would thus have the effect that led to the liabilities of the euro is
growing by as much in relation to lead the revenue, which mostly is in local
currency.
But wage cuts with the result that debt is growing in relation to earnings.
As Paul Krugman describes it: "A nominal devaluation and a real depreciation
achieved by means of deflation, would have exactly the same impact on debt
payments (unless the debt is in the lats rather than in the euro, in which case
devaluation would make minor harm)."
An important difference between Latvia and Argentina, of course, is the size.
For the EU, it is much easier to keep up the value of the small Latvian currency
than there was for the U.S. neighbours to save the Argentine peson.
The risk is that Frankfurt wants to stand as an example. If the ECB solves
out the Baltic States, it is difficult to say no to other vulnerable members
such as Greece, Spain and Italy.
For Germans, this has always been a nightmare with a single currency, it will
force them to let bank-note makers roll to bail out bankrupt Member States,
which is incapable of managing their own finances.
The IMF was also divided. When the decision was taken was the number who
favoured devaluation as a condition for lending.
If Latvia finally goes the way of Argentina, there may also be devaluation,
combined with some sort of forced conversion - from the euro to latitude - of
the private sector's debts and receivables. In that case it becomes a currency
loss that strikes straight into the income statements of the SEB and Swedbank.
But it is really inevitable that Sweden suffer in one way or another. If our
neighbours are facing economic collapse, we have a heavy responsibility to clear
up the situation. Not just for the sake of the Swedish commercial banks but of
pure, blatant safety political self-interest.
In the event of a worsening economic crisis, an increasingly authoritarian
and revenge desirous Russia takes the opportunity to whip up sentiments among
the Russian-speaking population in Latvia. Russia's actions in Georgia in the
summer should serve as a cautionary example.
Swedish taxpayers' money can be used to stabilize our neighbours, both
economically and politically.
But only as an alternative. In the first instance let there be the
consequences of an economic crash in the Baltics affect shareholders of SEB and
Swedbank.