Financial market reform nears agreement

RIGA - Nordic central banks and governments say they are close to signing an agreement with their Baltic counterparts that lays down rules to help contain potential cross-regional fallout during the banking crises, reports Bloomberg. The agreement will define how countries in the two regions conduct stress tests; it will require an exchange of financial information and prescribe crisis-management procedures, says Estonian Finance Ministry spokeswoman Katrin Reimann. Finance ministries, financial regulators and central banks will sign the accord in “the coming weeks,” she said.  Sweden’s central bank, whose lenders dominate in Latvia, Estonia and Lithuania, already has a law allowing it to provide loans to the Baltics to support monetary policy and their currencies.

Broader agreements are needed as an “acute crisis” in the former Soviet region would be “detrimental to Sweden’s economic development,” said Riksbank Governor Stefan Ingves. He has also called for “stricter” cross-border regulation.   Swedbank, SEB and Nordea Bank expect to take losses on their Baltic portfolios of 2.4 billion euros this year, estimates the Riksbank. Swedish banks’ total lending to the Baltic region stands at about 39.5 billion euros, 80 percent of which is denominated in euros.
The three Baltic countries splurged on a debt-fueled consumer spending boom that started when they joined the European Union in 2004. Latvia’s economy grew close to 12 percent in 2006, and by 2007 corporate bank lending grew as much as 50 percent, while retail lending rose as much as 70 percent, the Riksbank estimates. Boom turned to bust when the financial crisis cut off access to credit and investors pulled their money out of emerging markets, returning to the safety of less risky environs. Latvia’s second-biggest bank failed after a run on its deposits, forcing a state rescue that has brought the economy to its knees.

Delinquent loans stemming from the Baltic economies remain the biggest threat to Swedish financial stability, reported the Riksbank on Nov. 26. East European banks, including those in the Baltic region, are “not yet out of the woods” and the outlook for the financial services industry in economies that will probably stay in recession this year remains “worrying,” said analysts at Capital Economics last month.