Schweden: Riksbank erhält 3 Mrd. EUR von EZB!

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11.06.2009

ECB bails out Sweden

The Swedish Riksbank has obtained a €3bn euro credit from the ECB to prop up its own banking system, which had lent massively to Latvia, where a devaluation would cause massive losses to the Swedish sector.

The deal came as part of a previously undisclosed swap agreement between the two central banks, which was drawn up in 2007, the FT reports. The Riksbank said the goal is to stabilise the system (but it is now obvious that the Swedes are now preparing for Latvia’s D-Day, as devaluation becomes inevitable). The share price of Swedish banks improved yesterday, and so did the krona’s exchange rate. The article also quotes Joaquin Almunia, EU economics commissioner, as saying that Latvia has to hang in there, for all other options are likely to be more painful.

Roubini: Solutions for Lavia

Writing in the Financial Times, Nouriel Roubini proposes strategies for Latvia. The best option would be for a devaluation followed by instant euroisation, to prevent an exchange rate overshooting, which is almost certain to occur after ending the peg. He argues that euroisation without devaluation is not going to work, as real depreciation is necessary to restore competitiveness. Of course, any devaluation will have dramatic balance sheet effects, and will require debt restructuring. He concludes that a currency and financial crisis seems unavoidable now. The best that can be hoped for is to minimise the domestic and international costs.

Stokes: Contagion effects?

An excellent comment by Mary Stokes in RGE Analysts’ EconoMonitor about the possibility of contagion from the Latvian crisis. She said a Latvian crisis would hit Estonia and Lithuania through trade and financial linkages, and it would affect Sweden through the exposure of Swedish banks in the region. The question is how would it affect the other CEE countries? Direct trade and financial linkages are not very strong. The main effect would be what she calls the “wake-up channel”, a wake-up call to investors to pull out of the region as a whole.

Take the punchball away at the first remote sighting of green shoots

Axel Weber did not exactly say the ECB should raise interest rates. But he came close by raising a trial balloon when he said that raising interest rates as a precaution at this stage would present the ECB with a communication challenge, ”one which can be mastered”. The Wall Street Journal points out that other European central bankers, including Lucas Papademos, took a gentler line. The article also quotes Yves Mersh as warning against too much optimism about economic stabilisation. The existing rate cuts have yet to sink in.

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