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.
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Rumors of Instability
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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.
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Indicators of Stability
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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.