Latvia Meets Criteria to Join the Euro

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Because they CAN’T! The foreign debt of Sweden is around 1000 bio. USD or slightly less than the double of their GDP. Naturally some foreign exchange adjustments will have to be made, as there is no doubt the overvalued (relative to the EUR) is hurting Swedish exports and giving Denmark and Germany a profitable market – not to mention that Germany has got lots of cheaper suppliers. Besides, the Danish CB has probably extended the credit to Sweden’s CB – which will mean that debasing the SEK will whack Sweden with an instantaneous loss in the CB.

The Swedish position gets even worse! Denmark has a negative deposit rate in the CB and a lending rate not much better. As Denmark gently raises the interest rate, Sweden can lower (within limits) the exchange rate. The variable interest rate bonds will stay put till maturity as the raised interest rate will take them under par value.

The lowering of the exchange rate is important, as the Danske Bank A/S (CPH:DANSKE) (PINK:DNSKY) assets in Sweden are probably overvalued, compared to the Nordea assets in Denmark. When a swap will be made is hard to say – it will probably be a gradual process.

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Does this sound complicated? Well it should, as it is very complicated!

But this relationship is of vital importance to Latvia and the other Baltic States – and Finland for that matter as well. They will have to buy the debt of the Swedish banks in their country. Now as no banks take losses, and again Swedish banks are being particularly gross in that respect, no loans can be bought at face value, as the countries do not have a bank inspection to go over the books and the Swedes frankly cannot be trusted – otherwise a European Bank Inspection could have been a reasonably capable and neutral third party; but Sweden will have none of that. The alternative is to keep the SEK overvalued.

If the SEK is overvalued, it will give Sweden (and/or its banks) a loss due to the fact that they will get fewer (EUR, DKK, LAT or whatever – (same thing) for their loans. This may go some way to compensate for the lack of impairments on those loans in the Baltic branches of the Swedish banks.

Why should Sweden be interested at all in leaving the Baltic States? Well, as the credit quality of those loans probably is terrible, Sweden will in one way or another have to finance these slightly dented loans – and the Swedish foreign debt is not negligible!

To really spoil your appetite. Yet another actor on the stage is important: The exchange rate between the EUR and the USD. Referring back to the graph: The USD is steadily getting dearer, or the EUR is getting depreciated with respect to the USD. This means the possibility of keeping a high SEK increases.

The final aim for Latvia and the other Baltic States must be to recapitalise their banks under a nationalised ownership – as the European Commission’s warning about the identity of non-resident depositors could very quickly become a bank run.