RIGA - The Latvian government is preparing legislation that would limit homeowners' liabilities to the value of the underlying collateral, a move which could boost losses at banks that have lent in the Baltic region, reports news agency bbn.ee. The legislation would prevent creditors from claiming the borrowers' other assets if the creditors fail to recover the whole loan by selling the collateral.
Latvia's Prime Minister Valdis Dombrovskis (New Era) said that the plan "would be carefully considered and discussed with lenders." Sweden unsurprisingly slammed the proposal, reports Reuters. Dombrovskis says "the [current] situation in the financial markets and the increasing problems with the borrowers" is driving the proposal.
Sweden has already led criticism of its cross-sea neighbor for backtracking on spending cut promises already made to lenders. Vice-president of corporate communications at Swedbank Thomas Backteman said that these proposals to limit mortgage collections to the current value of homes, rather than to the value of the original loan "would deeply violate European law and cause a re-evaluation of [our] operations there," reports The Financial Times.
Latvia, trying to meet economic goals in its lifeline 7.5 billion euro bailout from the European Union, International Monetary Fund (IMF), Sweden and others, has already slashed 2009 spending, including cuts in public sector wages and pensions, and is struggling to agree on its 2010 budget.
Tensions in Latvia's five-party coalition have again risen over new cuts and fears have grown of possible social tensions this winter, though there has not yet been a repeat of a January 13 skirmish next to the parliament building, when drunken youths rampaged in anger at the previous government's economic failings.
The banking sector is led by Swedbank, SEB, Nordea and DNB Nord and they are already facing big losses in the real estate crash. Swedbank says its lending in Latvia accounts for just five percent of total loans; SEB gives this figure at 3 percent.
"We plan to have a meeting with the commercial bank association to discuss this issue and the protection of borrowers in general. This will take some work," said Dombrovskis. He also called it a relatively narrowly targeted measure of which a final draft would be ready in a month or so. He could not say whether it would have a retroactive impact and that the legal aspects of the proposal would be looked at.
"It would be of great harm to Latvia and its people not only in the long run, but also in a direct way," said Swedish Financial Markets Minister Mats Odell. "It would be a signal [for banks] not to be active in Latvia," he said.
"This proposal could be a part of the political bargaining with the IMF and EU," said head of emerging markets at Danske Bank, Lars Christensen. "The risk premium on the Latvian banking business is skyrocketing. The ramifications of this proposal [in which] 50 percent or more of all mortgage loans are covered, could be very severe, especially for Swedbank and SEB."
An IMF Oct. 9 report noted that Latvia's fiscal deficits had risen above program targets, reflecting a sharper than expected downturn amid "weak program implementation." The loan wrangles and the mortgage protection idea has again raised fears that Latvia is vulnerable to a devaluation of its currency, which is pegged to the euro.
The Latvian lat has been stuck at the maximally weak end of its band against the euro, but other regional currencies have suffered less from contagion fears than when Latvia faced similar problems with its budget in mid-2009. "The worst of the financial crisis is behind us so the market's getting more discriminatory. These currencies won't necessarily move in the same direction at the same time," said emerging-markets strategist at SocGen, Gaelle Blanchard. This puts Latvia out on a limb, alone.