Latvia is joining the Euro!
Frankfurter Allgemeine Zeitung has:
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- The deficit is at 1½% – well under the criteria of 3%.
- Public debt is 42% – again safely under the allowed 60%.
- It has had its currency bolted to the EUR since 2005 – which is more than 2 years.
- The 10 year sovereign bond at 3½% interest and the emergency loan paid back 2 years ahead of time.
- Inflation is the fly in the ointment: 2.3%, and as Greece and Ireland are in deflation it is higher than the allowed 1½% above the average of the lowest three Euro-zone countries.
The inflation is – if not a technicality – something that might improve with the drop in the Japanese Yen. The other side of the coin is that Latvia really took 2008 full force! In 2009, 18% of its GDP simply disappeared. The already low pensions were cut by 10% and public salaries with 20% as was public spending. And with a growth of 3.8% some of the shards have been picked up nicely.
But why the urgency in coming back for more?
As always: The banks!
The European Commission warned eurozone aspirant Latvia on Wednesday to guard against growing banking sector imbalances and to closely monitor the identity of non-resident account holders.
The banking sector in Latvia (and Estonia and Lithuania) is to all intents and purposes Swedish – only in Lithuania does a Norwegian bank sneak-in as an honourably mentioned third. Danske Bank A/S (CPH:DANSKE) (PINK:DNSKY) is jusy as pathetic and “also ran”. Thus we are talking Swedbank AB (PINK:SWDBY), SEB and Nordea in that order, which incidentally is more or less the reverse of their size in Sweden – and Handelsbanken is not in that particular mess.
This makes it strikingly obvious why Sweden does not want to join the European Bank Union. They are definitely not going to allow a German busybody to peruse their books asking awkward questions and prying into their machinations.
For the three nations, it is the question of being master in their own house. At least they have no intention of being chattel in Swedish banks – they had more than their fill of suppression when they were enslaved by the Soviet Union, and are determined NOT to go down that road once again. Whether Sweden has state owned banks or it is a bank owned state is a bit of a judgement call.
The question however is: How to get rid of the pesky Swedes?
Well, a very good first move is to get inside the EUR-zone, as Estonia already is. Neither country has any insurmountable foreign debt (50%-100% of GDP) as such. But all the countries are small indeed (between 1½ and 3½ mio. inhabitants) speaking three different languages – all totally incomprehensible to each other and the rest of the world. Estonian and Finnish are variants though – separated from the rest of the world for so long that some loaned words have been forgotten by their original speakers.
To be realistic: There is no way they under their own steam that they can build a potent bank inspection – a task superpowers have a hard time coming to grips with. In their favour is the fact that they are not sissies. Protest like the ones seen in Greece and Spain have not occurred, despite harder times.
That is probably why the Lithuanian president Dalia Grybauskaite (former EU- commissioner for budgets and keen as mustard) hovered around Danish journalists when PM Helle Thorning-Schmidt stormed in to attack the EU’s best protected quarterback just off the snap – German chancellor Angela Merkel. Besides a sports fan’s innate love of grievous bodily harm, there might be a hint or two to pick up for later use. As it happened, Helle Thorning had the speed and skill (and very fast moving high heeled pumps) to bring the sack off in a clean tackle – that one Merkel hadn’t seen before – a hard but fair tackle. How that ends remains to be seen, but no one was carried off.
As to the hints: In the third quarter of 2012, there was a major confrontation between Denmark and the Swedish Bank Nordea (which is also Denmark’s second largest bank), where Nordea Bank AB (STO:NDA-SEK) threatened to cancel the airline SAS credit line if the three Scandinavian states did not cough up more equity. The retort was blunt: “Declare SAS bankrupt – and see if we care!”
But that is only part of the story: Nordea Bank AB (STO:NDA-SEK) has approx. 16% market share on the Danish real estate mortgage market besides being no. 2 bank in Denmark with asset of 180 bio. USD and Danske Bank in Sweden being a shade over half as big with 94 bio. USD in assets on fifth place. In 2012, the Danish Bank Inspection has been going over the book of Nordea Denmark and Danske Bank Sweden to make sure that they were comparing the same credit quality – same standard of rot in both apples and pears – which is necessary to make a swap so Nordea gets out of Denmark and Danske Bank gets out of Sweden.
The next step is to lock in the variable interest mortgage loans, which are so pitiful that the issuers have to buy them themselves. Danish banks are clearly the responsibility of Denmark, so the mortgage banks gets funding through the Danish CB, but there is no way the Danish CB is going to finance a Swedish state owned bank – at least not without getting a firm grip on the Swedish CB.
The reason why, should be evident from the graph of exchange rates!
The bonds Nordea Bank AB (STO:NDA-SEK) bought at 84 DKK / 100 SEK – or 120 SEK/100 DKK they and sold it at 88 DKK/ 100 SEK – 114 SEK/ 100 DKK – incurring a loss of 5% way out of line with the interest rate of 1-2% all considered. The question is why does Sweden not debase their currency?