Estonia's Trade Deficit Drops In August

I suppose in the midst of all this mess we should be thankful for small mercies. Estonia posted its smallest trade deficit in two and a half years in August, helped by in part by rising exports, and in part by the declining cost of crude oil (which reduced the value of imports).

Estonia's deficit narrowed to 2.7 billion krooni ($220 million), down from a revised 4.3 billion krooni in July, according to data out today from the statistics office.





Exports rose an annual 8 percent and imports fell 6 percent. Thus we could say that August was a comparatively good month, but we should not draw any very extensive conclusions from this about what we may now get to see next in September and October. Really we will need to wait and see the data for next January and February (by which time we could hope things will have settled down a bit) before we can begin any real damage assessment.



Latvian Central Bank Buys More Lati


The Latvian central bank bought about 86 million lati ($150.8 million) in the market last week to support the currency after it weakened to the limit of its trading band, according to data released by the central bank today The lats fell to 0.7098 against the euro for the fourth consecutive week, prompting the bank to buy it. The currency is allowed to rise or fall 1 percent from a midpoint to the euro.

The central bank has bought about 237.5 million lati over the last four weeks. It had foreign currency reserves of about $6 billion at the end of September, which would cover the last five months of imports. This month's bank intervention has reduced reserves by about 7 percent.

Swedbank To Raise Capital

Swedbank have said today (Monday) that they plan to raise more than $1.5 billion in a rights issue at the same time as the Swedish central bank have announced that they are to provide capital for a smaller bank in an attempt to lessen the risk of "serious" systemic disruption. Swedbank, whose shares have slumped lately on worries about mounting credit losses from its Baltic business, thus became the first major Swedish financial firm to shore up its balance sheet during the current crisis.

But the bank was swiftly joined by investment bank Carnegie which said it had been granted a 1 billion Swedish crown ($126 million) bridge loan from the Riksbank pending a government guarantee scheme.

Swedish banks until recently were considered less vulnerable to the global credit crisis: They had little direct exposure to sub-prime mortgages and a more conservative financial profile. But Swedbank's exposure to the Baltics, where it had expanded in the search for stronger growth, has obviously rattled the market, and follows a pattern of banks whose domestic markets did not suffer from a domestic property bubble getting over-exposed in other countries where they did.

Carnegie's capital boost was less than a 10th the one Swedbank are contemplating, but the Riksbank's statement raised the possibility of systemic problems.

"Given the currently prevailing anxiety, the Riksbank has decided to grant
liquidity assistance to Carnegie to reduce the risk of a serious disruption to
the financial system," Riksbank Governor Stefan Ingves said in the statement.

Carnegie was finding it difficult to finance payments and it was suffering from increased collateral requirements in the wake of the financial crisis.

Swedbank said it plans to issue one preference share for every two existing ordinary shares at 48 crowns per share, raising a total of 12.4 billion Crowns. Swedbank said the issue was fully underwritten by investors. The issue will boost the group's Tier 1 capital ratio to 10.5 percent from the present 8.7 percent and its core Tier 1 ratio to 9.2 percent from 7.4.

Swedbank's declared loan losses in the Baltic region were 405 million crowns in the third quarter, against 153 million crowns in the same period a year earlier and 245 million in the second quarter of 2008. Swedbank and its domestic peer SEB have both in recent years expanded in the Baltic region. But as the financial crisis has worsened, and economic prospects for the Baltic countries have grown steadily bleaker, generalised concerns that loan losses at the banks could rise sharply have been mounting.

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

The Baltic States May Soon Follow Hungary Into IMF Receivership

Well, the Icelandic authorities seem to have bitten the bullet, and after some coming and going agreed to accept assistance from the IMF. An IMF mission is on the island preparing a plan which will then be put to the Icelandic government (protocols here are important). Under negotiation are the terms of any possible loan. According to Einar Karl Haraldsson (a political adviser to the Icelandic government) the plan is expected to be finalized in the next few days, after which the government will have to decide whether to accept the aid and the terms under which it is being offered.

Meantime a growing number of countries now seem to be at risk of following Iceland and Hungary into the arms of the IMF, with the Baltic republics of Estonia, Latvia and Lithuania now looking particularly vulnerable, according to a warning from the International Monetary Fund itself yesterday.

Dominique Strauss-Kahn, managing director of the IMF, which was formally approached yesterday for assistance by Hungary as well as Iceland, said: "The fallout for most banking systems in emerging and developing economies has been limited so far but signs of stress are growing, " Strauss-Kahn said some banks in eastern Europe have become increasingly exposed to struggling property markets, having raised funds on international money markets in the same way as the ill-fated Icelandic banks.

For the time being the various national governments are denying the possibility, with Edgars Vaikulis, spokesman for Prime Minister Ivars Godmanis, being quoted in Bloomberg as saying "There is no reason to speak of threats to the Latvian financial system......Latvia's situation is different from some of the eurozone members.''

I'm sure that the latter statement is true, even if not in the sense that Vaikulis meant. Nonetheless the Latvian government has taken the step of raising guarantees on all bank deposits to 50,000 euros ($68,225), in line with an earlier decision by European Union finance ministers.

In my view the threat to the Baltic financial systems is real, as is the threat to the Bulgarian and Romanian ones. Action, of some form or another needs to be taken, and soon. Latvia and Estonia are now in deep recessions, and Lithuania, while still clinging on to growth, can't be far behind. Basically it is hard to see any revival in domestic demand in the immediate future, which means these countries now need to live from exports. But with the very high inflation they have had it is hard to see how they can restore competitiveness while retaining their currency pegs to the euro. The IMF will almost certainly insist on a currency float as a condition of rescue, and if you look at the speeches of Lorenzo Bini Smaghi and Jürgen Stark over the last year, it is clear that thinking at the ECB runs along pretty much the same lines. So better get it over and done with now I would say, and take advantage of the shelter offered in the arms of the IMF. Indeed the more I look at what is happening, the more it would appear that a division of labour was agreed to in Paris last weekend, with the EU institutional structure sorting out the mess in Ireland and the South of Europe, and the IMF taking care of all that broken crockery out there in the EU10.

In what is likely to become a sign of the times Hungary's MKB Bank announced that yesterday that it is going to stop providing euro- and Swiss franc-denominated loans until further notice. In defence of its decision MKB said the huge volatility registered in the value of forint in recent weeks, and especially the strong depreciation at the end of last week, make the outlook on the currency extermely uncertain. Most other Hungarian banks are expected to follow MKB's lead. This practice of bringing an end to the extremely dangerous practice of offering foreign exchange denominated loans in countries running large external deficits is now likely to come to a screeching halt all across the CEE and CIS economies, and bit by bit the IMF will have to be brought in to offer support during the transition back to reality.

For a full and thorough analysis of the current threat to the Baltic economies, see this whopping post this morning from Claus Vistesen.