Krona slides further on Baltic economy worries

Concerns about economic developments in the Baltic region are the likely cause of the krona’s steady slide in recent days, according to several experts.

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In just the last few days, the krona has slipped by 40 öre ($0.05) against the euro and 30 öre against the dollar, and experts are convinced the cause has a simple explanation.

“You can sum it up in one word: Baltics,” said Robert Bergqvist, head economist at the SEB bank, to the TT news agency.

However, the latest wave of concern about the fate of the Baltic countries likely originated back in Sweden.

The Riksbank’s decision on Wednesday to strengthen its foreign currency reserves by borrowing 100 billion kronor is being interpreted by some as a preparation for a devaluation first in Latvia, and then in the other Baltic countries.

Torbjörn Becker, head of the SITE research institute at the Stockholm School of Economics, thinks a currency devaluation in Latvia is likely.

“They’ve invested a lot of political capital to maintain their fixed exchange rate, but in the long term it’s unsustainable,” he said.

Meanwhile, the head economist at Swedbank, Cecilia Hermansson, believes a devaluation in Latvia will depends on an upcoming June decision from the International Monetary Fund about whether or not to grant the country another emergency loan.

Nevertheless, neither the central bank of Latvia or Lithuania have indicated they have any plans to devalue.

Currency devaluations in the Baltic would have negative effects for Swedish banks, especially Swedbank and SEB, which hundreds of millions of kronor in loans in the region.

That may be one explanation as to why the krona continues to weaken on international currency markets.

Pressure on the krona has also come from faulty information in the international business press which claim that Sweden’s National Debt Office (Riksgälden) plans to sell Swedish kronor.

In actuality, the Debt Office plans to lend 100 billion kronor worth of foreign currency to the Riksbank to strengthen the central bank’s reserves after having made substantial dollar-denominated loans to Swedish banks throughout the financial crisis.