LATVIAN BANKING SECTOR APPEARS STABLE DESPITE RUMORS

UNCLAS RIGA 000620 SIPDIS E.O. 12958: N/A TAGS: ECON EFIN ETRD LG SUBJECT: LATVIAN BANKING SECTOR APPEARS STABLE DESPITE RUMORS REF: RIGA 00619 ¶1. Summary: Despite speculation to the contrary, the Latvian banking sector appears to be at little risk of the kind of collapse that threatened Iceland. Speculation has centered around the deteriorating condition of the national economy, rapid decline of global financial markets, reports of parent banks' exposure to toxic assets, and troubles in the Nordic countries combined with dubious news stories. However, the main indicators of the sector are robust, exposure of Latvian banks to toxic assets is minimal, and the largest bank in Latvia, Swedbank, which has been the primary target of various rumors, remains stable. -------------- Rumors of Instability -------------- ¶2. To a large extent, the fears over the stability of Latvian banks are based on the the evident slowdown of economic activity, the increasing possibibility of a prolonged recession and lingering consumer price inflation. Some believe this turbulence could dramatically increase loan default rates. Fitch downgraded Swedbank's future outlook due to the econlmic worries in the Baltics, but did not change the rating of its individual unit in Latvia. The long term effect on default rates remains to be seen, but for the time being, the rates are fairly low. Swedbank notes that its rate of 90-day late payments is only 0.91%, while the market average is 2.6%. ¶3. There is also concern that that Swedbank and SEB's troubles at home might have an effect on their subsidiaries in Latvia. These worries were intensified by a report aired last week on evening news of Latvia's National Television. The story claimed that the crisis in these two banks is demonstrated by the plunge of their stock. The story was heavily criticized and called unprofessional by a member of the parliament. To add to the existing tension, the Latvian Security Police announced they have received a request to investigate alleged deliberate attempts to destabilize the Latvian financial system. -------------- Indicators of Stability -------------- ¶3. In meetings with Ambassador Larson, Prime Minister Godmanis and his advisors affirmed their confidence in the Latvian banking system. See Reftel. ¶4. Teodors Tverijons, President of Commercial Bank Association of Latvia, publically denounced the rumors and stated that the banking sector is more than stable. Tverijons reiterated that banks are not facing any trouble, pointing out that liquidity of Latvian banks is just over 50%, well above the required 30%, and equity capital is over 12%, again above the required 8%. ¶5. Maris Avotins, Chairman of Swedbank Latvia, in an October 3 meeting with Ambassador Larson, reaffirmed that Swedbank is on solid ground and that any rumors over the instability of the bank are unwarranted. Swedbank Chief Economist Martins Kazaks, in a separate conversation, highlighted that the equity capital of Swedbank Latvia is firm at 12.66% and liquidity is over 40%. Kazaks asserts that the bank's capital buffer and liquidity level are sufficienrly high to absorb unexpected changes in the market and provide long term security for the bank. ¶6. To help restore customer confidence and faith in bank savings, the Financial and Capital Markets Comission of Latvia announced it has begun work on implementing the EU directive adopted on October 8 to raise deposit insurance from 20,000 EUR to 50,000 EUR.