UPDATE ON FINANCIAL CRISIS IN SWEDEN: CREDIT RATING DOWN

UNCLAS STOCKHOLM 000137 SIPDIS TREASURY FOR ERIC MEYER, BILL LINDQUIST, VIMAL ATUKORALA E.O. 12958:N/A TAGS: ECON EFIN SW SUBJECT: UPDATE ON FINANCIAL CRISIS IN SWEDEN: CREDIT RATING DOWN FOR SWEDBANK, WARNINGS ABOUT BANKS' EXPOSURE IN EASTERN EUROPE REF: A) 08 STOCKHOLM 707, B) 08 STOCKHOLM 714 C) 08 STOCKHOLM 809, D) STOCKHOLM 72 Moody's lower Swedbank's credit rating -------------- ¶1. Credit rating company Moody's stated in a press release January 27 that it is worried about Swedbank's exposure to the Baltic States and has decided to lower the bank's credit rating from A1 to Aa3 with negative prospects. The lowering of the rating reflects the macro economic development in the Baltic States, but also to certain extent in Sweden. Latvia criticizes Swedish Banks -------------- ¶2. On February 27 Swedish press highlighted the statements by Valdis Dombrovskis (Latvian PM designate) who says the Swedish banks are partly to blame for the country's financial problems. His mission is to help Latvia escape the financial crisis that recently led to the fall of the government. He does not promise to fulfill all the demands connected to the Euro 7.5 billion loan issued to Latvia by Sweden and the other Nordics, the EU, and the IMF. He also anticipates that the budget deficit might turn out even larger than the previously estimated 5 percent figure. "The figure is currently at 12 percent, and might get even worse", Dombrovskis said. Troubled Swedbank in Ukraine -------------- ¶3. Recent developments in Ukraine have further increased the market's worries about the need for yet another private share issuance, or government injection of capital into Swedbank. Swedbank has a total of USD 2.5 billion in lending to Ukraine. "The acceleration has been rapid, and no one knows today where this will end", Mats Andersson, independent analyzer, told the press. A couple of weeks ago the bank was forced to decrease the value of its Ukrainian activities by USD 0.2 billion. In addition, Standard & Poor's recently lowered Ukraine's credit rating and Moody's issued a warning for in total 21 banks in Ukraine (Swedbank included). EBRD -------------- ¶4. The European Bank for Reconstruction and Development (EBRD) estimates Swedish banks' credit losses will amount to as much as USD 11.8 billion in Eastern Europe. On February 27 Thomas Mirow, head of EBRD, will meet with Swedish Minister for Finance, Anders Borg, and Stefan Ingves, head of the Swedish Riksbank (Central Bank),to discuss the accelerating financial crisis of Eastern Europe. ¶5. Hungary, Latvia and Lithuania have applied for emergency loans in the IMF, and they are expected to be followed by several other countries in the region. EBRD predicts a dark future for these countries and estimates credit losses to amount to as much as 10-20 percent on average. The focus of today's meeting will be to find a way for the Swedish banks to handle the situation. Swedish Riksbank enters into a precautionary arrangement with the Estonian central bank -------------- ¶6. The Riksbank and Eesti Pank, the Central bank of Estonia, have entered into a precautionary arrangement to secure financial stability and to promote confidence on the financial markets. Under the agreement, Eesti Pank may borrow up to SEK 10 billion (USD 1.12 billion) against Estonian kroons. The precautionary arrangement enhances the capabilities of Eesti Pank to provide liquidity under the currency board arrangement. ¶7. "It is important that Central banks cooperate and assist each other in times of financial stress. The financial systems in Estonia and Sweden are closely linked. The Riksbank is therefore helping to reinforce Eesti Pank's ability to safeguard financial stability in Estonia," says the Governor of the Riksbank, Stefan Ingves. SILVERMAN