Latvia to benefit from €3bn lump sum from ECB

THE EUROPEAN Central Bank (ECB) stepped in yesterday to help avert a Baltic financial crisis by lending €3 billion to the central bank in Sweden, whose banks dominate the region’s financial sector.

The ECB move signalled the Frankfurt institution’s willingness to shore up official European help for countries such as Latvia, which is fighting to avoid a potentially disastrous currency devaluation.

The €3 billion the ECB is supplying to the Riksbank will be used to boost the Swedish central bank’s foreign reserves – increasing its firepower to help Swedish private sector banks if necessary.

Since the global financial crisis erupted, the ECB has been wary about extending help beyond the borders of the 16-country euro zone. But yesterday’s move suggested it was prepared to go further in helping during the current Baltic turmoil.

Jean-Claude Trichet, ECB president, has been careful not to rule out stepping up direct help to the region, although such a move could prove controversial within the bank. The €3 billion is part of a previously undisclosed “swap” agreement, struck in December 2007, which allows the Riksbank to borrow up to €10 billion in exchange for Swedish kronor for up to three months.

Last week, Mr Trichet disclosed the ECB had an agreement allowing the Latvian central bank to obtain liquidity from his institution – but only against euro-denominated collateral.

The Latvian lat has stabilised this week, boosting sentiment towards other eastern European currencies, after Latvia’s government said it had found another 500 million lats (€711 million) in budget savings.

This has raised hopes that the International Monetary Fund will soon give approval for the next €1.4 billion tranche of multinational aid under the country’s stabilisation programme. “This gives us certainty about the next tranche,” said Kristaps Strazds, head of trading at SEB bank in Riga. “This should end the devaluation rumours . . .”

However, Joaquin Almunia, the EU’s economic affairs commissioner, stressed in Brussels the need for Latvia to sustain its budget cuts over the long term. “We are convinced that . . . all other possible alternatives are more painful or worse for the Latvian citizens, for the Latvian economy and also for the EU economy,” he said, noting the importance of keeping the lat’s peg to the euro, given Riga’s high level of foreign debt.

He was speaking after a meeting with Valdis Dombrovskis, Latvia’s prime minister.