For Sweden, tiny Latvia, Lithuania and Estonia are too big to fail
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STOCKHOLM: For Sweden, tiny Latvia, Lithuania and Estonia are too big to fail.
Sweden's banks plowed billions of kronor into the three booming but small countries across the Baltic Sea over the past decade. But severe recessions in the Baltic states are turning them into the Swedish equivalent of subprime U.S. mortgages — once favored investments that are now in decline.
For the Swedes, the Baltic crisis echoes the one that faced banks in their country in the early 1990s, when bold choices early in constructing a bailout paid off handsomely. That history gives them confidence they can pull off the feat again with the failing finances of entire countries.
"There is a strong feeling from our side that we have a political responsibility to do whatever we can to help them," Anders Borg, the Swedish finance minister, said during an interview. "They are new democracies; they are part of our economic region."
This deep sense of ownership of the Baltic success story is driving Sweden to spend ever-more money in the name of its own financial interests, as well as a broader desire in Europe to avoid a new East-West divide.
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How it will play out politically at home remains to be seen. Many believe some mixture of Swedish money along with Baltic well-being will evaporate before the crisis passes.
"I don't think we've seen the real test yet, which is when you put a large amount of Swedish taxpayer money into the Baltics," said Torbjoern Becker, the director of the Stockholm Institute of Transition Economics. Sweden's Baltic commitments, he said, are risking a heated debate similar to the one in the United States when it granted a $20 billion loan to Mexico in 1995 during a currency crisis there.
Swedish banks have loaned an amount equivalent to roughly 20 percent of its gross domestic product to the Baltic countries, an amount that only a few years ago looked like a savvy bet on their stormy growth.
Now, according to Danske Bank, the loans could cost Sweden a total of 2 percent to 6 percent of GDP over several years, depending on the severity of the recessions that are now in full swing in the Baltics, as Baltic borrowers default en masse. This year, economies in all three Baltic countries could contract 6 percent to 10 percent, exacerbating the pain for Swedish banks and driving them further into the arms of their own government.
Bo Lundgren, head of the Swedish national debt office, said the course of the Baltics would be a crucial factor in the stability of the Swedish financial system. But as a grizzled veteran of Sweden's crisis in the early 1990s, he said the country could handle the shock. "You cannot rule out need for further capital injections," Lundgren said. "If state support is needed we are well prepared."
The effort to support the Baltic countries continues a long stretch of Swedish involvement with the Baltics that goes back centuries.
Swedish kings controlled the Baltics for a time and built universities there. More recently, Carl Bildt, a former prime minister of Sweden who is now its foreign minister, supported Baltic independence movements in the 1980s, as did Borg, then one of Bildt's young staffers. When the Baltic nations were free from Soviet domination, Sweden became a fierce advocate of their integration into European institutions.
Sometimes the ties are even familial. Lundgren and his wife have an adoptive son from Estonia.
That may be one reason why the strong Scandinavian presence is fairly uncontroversial in the Baltics. The Russian occupation of the three countries for much of the 20th century makes Swedes seem rather benign.
"You can find differences if you want — Swedes are Swedes and Estonians are Estonians," said Juhan Parts, Estonia's economy minister. "But there are no worries here about losing independence or economic power."
Still, Swedish banks contributed to the Baltic crisis by feeding years of a debt-fueled boom in real estate and construction there. The heady feel of newfound wealth underpinned free-spending habits that led to big current account deficits in all three countries, and hence an addiction to foreign capital.
With the real estate bubble now deflating, Swedish banks are left with unpaid mortgages and sour consumer loans. Swedbank, the Swedish bank most exposed in the Baltics, has had its loan-loss rate quadruple in the past year.
Sweden's first line of defense has been to embrace the Baltics through its own banks. The government passed its own rescue package in the autumn that included 1.5 trillion kronor, or $173 billion, to guarantee new issues of Swedish bank debt, a portion of which was to be used to recapitalize banks that had heavy losses.
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