Sweden Bails Out It's Banking Sector

Well, don't those days when everyone was arguing that the Baltic economies were going to be just fine, since they were such small beer that foreign banks would be only too happy to keep funding them until the cows came home. Well, the cows it seems have just reurned to their sheds.

Sweden has become the latest European country to take steps to stabilise its financial system by guaranteeing up to $205bn of new bank borrowing and creating a fund to take direct stakes in banks.

Stockholm had insisted there were few problems in its banking sector, but on Monday it was forced to match the stabilisation measures of other European governments and respond to fears its lenders might not escape the global financial crisis unscathed.

In particular there were worries a sharp correction in the economies of the Baltic nations of Latvia, Estonia and Lithuania could undermine its banks, which control two-thirds of lending in the three former Soviet states. Fears about this exposure were one reason share prices of Swedbank and SEB almost halved this year.

The new package involves a pledge to guarantee up to $205bn (€150bn, £120bn) of new medium-term bank borrowing and a separate SKr15bn ($2bn, €1.5bn, £1.2bn) fund that can be used to buy preference shares in any bank that needs a capital boost. As part of the legislation, which will go before parliament next week, the government will also assume the powers to take over banks.

This shoring-up of Sweden's banks could be thought of as an initial protection against any break in the Baltic pegs since as John Hempton points out in a detailed analysis of the situation:

If the Lati doesn't devalue its only because people (i.e. Swedbank) are prepared to continue to fund it. This is not pretty at all. All in Hansa owes Swedbank over 30 billion Swedish Kroner – all denominated in Euro and which can't be paid. The equity capital of Hansa (roughly 7 billion Swedish Kroner) is also going to default.

And there is always Claus Vistesen's most recent examination of the whole position if you are in the mood for a longer read.

And, oh yes, there is also the news that the Latvian central bank bought 24.8 million lati ($47.3 million) in the market last week to support the national currency after it weakened to the limit of its trading band, according to a statement by the bank.

The lats weakened to 0.7098 against the euro for the third consecutive week, prompting the bank to buy the currency to keep it within its trading band. The lats is allowed to move 1 percent on either side of a midpoint against the euro. The central bank has now bought about 151.5 million lati over the last three weeks to support the currency