Sweden has done as much as US

Politicians still have job to do to make Latvia competitive

According to a press release, issued by the Ministry for Foreign Affairs, the Latvian Foreign minister Aivis Ronis made some rather interesting comments at a lunch, organised by the American Chamber of Commerce. Apparently Ronis severely criticized the Swedish government in relation to the Swedish banks’ activities in Latvia.

I find it most regrettable that Mr Ronis has drawn such a conclusion, particularly as Sweden has been so supportive to Latvia on the ground and not just with comments through the media. As a Swede, who has been living in Latvia since 1993, believing Sweden has assisted the country, not the least through being the biggest investor nation (if you include ''Swedbank'' Estonia’s ownership of ''Swedbank Latvia'' and ''TeliaSonera''’s ownership in LMT via its Danish subsidiary), I am very disappointed that someone in Mr Ronis’ position could make such remarks.

All but one of the Latvian banks, owned by Swedish banks, are local banks, thus subject to control by Latvian authorities and not by the Swedish government. If the Swedish government would have intervened in Latvia, that could rightly have been criticized. Instead there was, as is the regular international practice, a close cooperation between the Swedish and Latvian banking supervisors under the leadership of the Latvian Capital markets commission.

Everybody loves to criticize banks. However, it is easy to forget that for some years after Latvia joined EU (where by the way the Swedish government was one of the main facilitators) and NATO (where the entry may have become easier because of the crucial role played by the then Swedish Prime Minister in the negotiations on early withdrawal of the Russian troops from Latvia) in 2004, the country lived in an artificial dream scenario, not the least fostered by Latvian politicians, stating that it was just to move on and there was no need for fiscal intervention. (On the monetary side there was very little that could be done, since the borrowing was made mainly in Euro, over which Latvijas Banka has no control and where the peg gave a false impression that this borrowing did not entail any currency risk). So since the politicians did not take their responsibility to tighten the fiscal regime, the country rushed into alarming current account deficits and alarmingly fast growing inflation.

In spite of warnings from the Governor of Latvijas Banka, the Foreign Investors’ Council in Latvia and leading economists in Latvia and abroad, the politicians did nothing, until an anti-inflationary program was finally introduced in the spring of 2007. For banks, local or foreign owned, it is not easy to put on the brake in a situation, where there are no signals from the authorities to curtail lending; on the contrary everything seemed to encourage increased lending, because that created growth. (Retrospectively, I think one should, perhaps, be a bit careful in criticizing the Latvian politicians for their lack of insight in the risks, that the lax fiscal policies created; they were not the only ones; everywhere, perhaps with the exceptions of Estonia, Sweden and Finland, the attitudes were similar).

What the Swedish government could have done in this situation is difficult to see, apart from keeping careful watch over the lending by Latvian banks, owned by Swedish banks, that might lead to credit losses, which the Swedish supervisory authority did. They even went so far as to employ the former head of the Capital Market Commission in Latvia in the Swedish supervisory agency. The Swedish banks did not abandon their subsidiaries in the crisis, something that international banks have done all too often, but kept them well funded and injected new capital – a most responsible behaviour that has been well acknowledged by the Governor of Latvijas Banka.

Anyway, because of the financial crisis, that erupted in the USA, also due to lax fiscal and monetary policy and an astonishing lack of control of certain parts of the banking sector, the international financial crisis reached Latvia. Latvia was already in a domestic crisis because of the overheating, high inflation and current account deficit, but the international development made it obvious that Latvia could not continue on its present way. If one should criticize Sweden, or perhaps more adequately the European Union (EU), it would be for the (within EU uncoordinated) introduction of government guarantees for deposits. When Sweden followed Ireland in introducing such guarantees, that might have triggered the run on ''Parex Bank'', which forced the government to take over the bank at the cost of 2 LVL, but also forced the government to seek international assistance.

The Foreign Minister thanked the US for its support, which might have been there, but as I recall it and, I am sure, anyone in the Foreign Office of Latvia would know, Sweden played a crucial role in putting together the rescue package for Latvia. The Swedish Minister of Finance Anders Borg spared no effort to convince the EU, IMF (against strong hesitation from the US and other countries as to keeping the peg) and IBRD to support Latvia. One could argue that this might have been done in self interest, but I cannot understand, that anybody could deny, that Sweden made great efforts to bring the rescue package together, also containing financial support from Sweden, Estonia, Norway and the Czech Republic. In my mind that could be as valuable as some nice words from the US administration for the good work done by Latvia. It is no doubt, that the Latvian government has accomplished a lot in terms of adjusting some structural imbalances and deserves all credit for this.

The big worry now is, I think, that since some improvement has taken place, populistic politicians in view of the upcoming elections could say that enough is enough and let’s forget the agreement of IMF and EU. There are still a number of structural reforms that have to be undertaken in order to bring Latvia back to a highly competitive situation. Let us pray that the politicians will take their responsibility and let the government concentrate on bringing Latvia back on course.

Gunnar Ljungdahl is Senior Vice President at Stockholm School of Economics in Riga.