Europese Centrale Bank leent drie miljard aan Zweedse centrale bank (en)
The European Central Bank i announced plans to lend €3 billion to Sweden's central bank on Wednesday (10 June) as the country comes to terms with its heavy exposure to the crisis-hit Baltic region and in particular Latvia.
The loan – part of a swap agreement whereby the Riksbank can borrow up to €10 billion from the ECB in exchange for Swedish kronor - will help the Swedish central bank in turn to provide greater support to the country's private banks that currently face extensive loan losses.
"As a substantial part of the Swedish banks' funding is in foreign currency, the Riksbank needs to have a sufficiently large foreign-exchange reserve to be able to meet a potential need from the banks," the Riksbank said in a statement.
The ECB move is also intended to shore up confidence in the Baltic area where a collapse of Swedish banks – the main lenders in the region – could prove disastrous.
The Latvian government is currently battling to maintain its currency peg against the euro, with fears that an untidy devaluation could plunge the country into further economic turmoil.
The ECB has so far been reluctant to provide direct support to non-Eurozone states, although last week the bank's president, Jean-Claude Trichet, announced there was an agreement to provide a limited amount of liquidity to the Latvian central bank.
On Tuesday, the Latvian government announced further budget cuts in order to secure the next tranche of a €7.5 billion loan agreed with the EU and IMF last December, helping to stabilise the country's currency.
A forced currency devaluation would see the value of Latvia's private sector debt – largely denominated in foreign currency – greatly increase in real terms, creating extreme difficulties for the county's companies and households to pay back loans owed to Swedish banks.
The €3 billion loan announcement is a sign that Sweden is preparing its foreign currency reserves for extensive losses on Baltic-region loans.
The country's Financial Supervisory Authority announced on Wednesday that Swedish banks have sufficient capital to weather a worst-case scenario of more than €30 billion in loan losses over the next three years.
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