SWEDISH GOVERNMENT PUBLICALLY PRESSURES LATVIAN GOVERNMENT

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SENSITIVE BUT UNCLASSIFIED

SIPDIS

E.O. 12958:N/A
TAGS: EFIN ECON ECIN PGOV SW
SUBJECT: SWEDISH GOVERNMENT PUBLICALLY PRESSURES LATVIAN GOVERNMENT

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1. (U) Summary: Swedish officials publicly chastised the Government
of Latvia for its inability to present a 2010 budget that would
satisfy IMF and EU conditions during the annual IMF meeting this
weekend. Swedish Prime Minister Fredrik Reinfeldt and Finance
Minister Andres Borg warned Riga that next disbursements of the aid
to rescue the Latvian economy will be jeopardized if Latvian
authorities fail to follow through on promises made to lenders.
Latvian Prime Minister Valdis Dombrovskis called the comments
unhelpful while Swedish banks reiterated their commitment to stay
the course in Latvia. End Summary.


2. (U) The Latvian government in July renegotiated the original
terms of the $10.5 billion rescue package agreed upon on in December
2008 and committed to reduce the 2010 budget deficit to 10 percent
by cutting spending by $1 billion in 2010 to secure the second
tranche of the aid package, to which Sweden is third largest
contributor after the EU and the IMF. Prime Minister Dombrovskis on
20 September, however, presented a 2010 budget outline that
effectively acknowledged that the government will not comply with
its IMF and EU commitments.


3. (U) Swedish Finance Minister Anders Borg increased the pressure
on the Latvian government by stating publicly that it will be very
difficult to secure the continued support of other lenders "if the
Latvians don't even live up to what they promised." "You can simply
not behave like this," Borg said. Swedish Prime Minister Fredrik
Reinfeldt echoed Borg's comments and expressed publically his
displeasure with the Latvian government's lack of commitment to
follow through. "If you make a deal to get a hold on the Latvian
economy, then the Latvian Government has to make sure to do its part
of the bargain," Reinfeldt said and at the same time warned that
"the cuts are preconditions for (Sweden) to make the payments and
that "the IMF will also have issues with this."


4. (U) The Latvian Prime Minister Valdis Dombrovskis responded by
calling these comments "unhelpful" and added that the Latvian
government is trying to avoid saving for the sake of saving alone.
"I have heard no credible economic analysis behind the comments by
Borg," Dombrovskis said. Despite the concerns, Dombrovskis
reiterated that Riga will meet the deficit goal (of no more than 10
percent of GDP in 2010 and 8.5 percent the following year) despite
smaller cuts and questioned the economic reasons that would justify
Borg's comments. He expressed his disillusionment by adding: "I have
held negotiations with the IMF and the European Commission and they
have not even been close to show the same level of aggressiveness as
Borg."

Swedish banks not concerned, prepared for all possible outcomes
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5. (U) Despite the concern expressed by Reinfeldt and Borg, major
Nordic banks have not publically echoed the Swedish government's
concerns. "There are now ongoing negotiations on the third part of
the IMF support-package and these recent statements should be viewed
in the light of that," said Thomas Backteman, Director of
Communications at Swedbank. Backteman noted that "we have continuous
contacts with Swedish authorities and politicians." Backteman
emphasized that "(Swedbank's) strategy is to be prepared for all
possible outcomes and that "no EU member will be allowed to cancel
its payments." "Latvia has not had reason to change over the last
couple of days," according to Backteman." Vivika Hirdman-Ryrberg,
Head of Communications at SEB, mirrored Backteman's comments and
emphasized publically the Swedish banks' joint declaration in
September to continue its long-term commitments in the region.
Similarly, Nordea's Helena Vsterman, Chief Press Officer, said that
there appears to be no reason for concern and that "there are no
reasons for changing (Nordea's) strategy in the Baltic region. For
us there are no greater reasons for concern now than it was
earlier."



6. (U) In contrast, the Stockholm Business Daily Newspaper Dagens
Industri reported that the situation is far worse than it seems.
Alf Vanags, Director at the Baltic International Centre for Economic
Policy Studies, commented that "Anders Borg's and the IMF's views
[on the current situation] are far worse than they want to admit
publicly. The current situation in Latvia is that the government is
not capable of agreeing on anything." He added that "(he) has long
believed that the way out of this situation, and it would be a good
way, would be to change the exchange rate. That would give the
government authorities room to act."

Comment
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7. (SBU) Comment: We think this sudden public breach is more a
signal to the Latvian government than a sign of Swedish plans to
withdrawal of support for Latvia's current economic stabilization
program. Swedish Finance Ministry officials, and Swedish bankers,
have repeatedly told us of their close cooperation with Latvian

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counterparts. The banks have assured us they intend to stay in
Latvia for the long haul to expand their market share, and that they
view the Baltics as their home market. The criticism consistently
voiced to us by Finance Minister Borg, and his State Secretaries Per
Jansson and Matts Odell is that because of the "political
philosophy" of the "neoconservative" Latvian government they are
choosing the painful course of an international devaluation rather
than adjusting their currency, and they are attempting the entire
adjustment through severe budget cuts rather than tax increases.
Since July, Swedish officials have questioned whether Latvia's plans
were sustainable, with Finance Minister Borg telling us the chance
of a devaluation by year-end were 50-50.


8. (SBU) Comment continued: A lats devaluation would result in
accelerated, but manageable, loan losses for those Swedish banks
with significant exposure to Latvia. The risks the Latvian economy
poses to Swedish banks became evident shortly after Borg and
Reinfeldt's comments during the October 5 trading session as SEB and
Swedbank stocks fell by 4 and 2 percent, respectively. Post will
follow up with our contacts and report more via septel. End comment.


BARZUN