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Despite the region’s small size, the intensifying crisis in the Baltics cannot be treated as a freakish local squall of little concern to outsiders.
Bank failures or plunging currencies in the three Baltic nations – Latvia, Lithuania and Estonia – could threaten the fragile prospect of recovery in the rest of Europe.
These countries also sit on one of the world’s most sensitive political fault-lines.
They are the European Union’s frontier states, bordering Russia.

Gideon Rachman, Financial Times, August 3 2009

Lithuania rules out devaluation
“It’s clear that we are suffering a bit more because of our currency board arrangement tying the litas to the euro, but devaluation is not an option,”
Andrius Kubilius, prime minister
Financial Times June 18 2009

Lithuania’s finance ministry forecasts that the economy will contract by 18.2 per cent this year, while the national central bank predicts a slump of 15.6 per cent.

Lithuania’s finance ministry forecasts that the economy will contract by 18.2 per cent this year, while the national central bank predicts a slump of 15.6 per cent.

The public spending cuts and tax increases required to tackle the recession, while keeping the litas pegged to the euro, have generated social and political tensions in Lithuania, as in neighbouring Latvia.

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Lithuania is regarded as the next most likely European Union state
to beat a path to the IMF’s door, following in the footsteps of Hungary, Latvia and most recently Romania.
Financial Tmes, March 26 2009

As in neighbouring Latvia and Estonia, Lithuania’s once-booming economy has gone sharply into reverse as credit and export markets dry up, shattering consumer and business confidence.

“Our exit strategy from this crisis shall be to join the eurozone as quickly as possible,” Mr Semeta said.
“This means we need to continue the implementation of a very strict fiscal policy.”

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Bevare oss för euron
Hopplös är situationen i de baltiska länderna som alla
knutit sina valutor till euron.

Tomas Fischer, Fokus 19/2 2009

Över 90 procent av alla pengar i Estland som lånats ut har skett i euro. I Lettland och Litauen är situationen likartad.
Skulle en devalvering ske blir lånen väldigt mycket dyrare för kunderna, och betydligt svårare att betala tillbaka
SvD Näringsliv, reporter Johanna Petersson, 23 oktober 2008

I Estland har varannan kund sitt bolån hos Swedbank och 85 procent av banksystemet är svenskt. I Lettland och Litauen har Nordea, SEB och Swedbank också en stor dominans.

Ordet devalvering får inte ens sägas på telefon av bankanställda i Lettland - där har säkerhetspolisen lovat att utreda vilka som ligger bakom finanskrisrykten.

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RGE Monitor's Newsletter

All three Baltics (Estonia, Latvia, and Lithuania) boomed over the last seven years and posted double-digit growth rates at their peak, helped by cheap credit from Scandinavian parent banks and EU membership in 2004. Now these economies are in the midst of a sharp slowdown, with Latvia and Estonia officially in recession.
There is no question that the Baltics are in for hard times. In the context of the global credit crisis, the risk is that foreign capital inflows could dry up and lead to an even sharper slowdown that could infect the financial sector. But there are some factors that suggest the sharp slowdown might not evolve into a full-fledged, Iceland-level crisis.

One, external deficits in the Baltics are funded to a large extent by inflows from Swedish parent banks, and sharply cutting off credit would hurt these banks.

Two, substantial foreign ownership of banking assets limits the governments’ contingent liabilities, as Swedish parent banks would be expected to provide support to their Baltic subsidiaries if they get into trouble.

Three, the Baltics’ sharp slowdowns have led to speculation that devaluations (they have exchange rates pegs to the euro) could be in the offing. While devaluation cannot be completely ruled out, such fears may be overblown as these countries tend to have shallow financial markets, relative little hot capital, and successfully defended against speculative attacks earlier this year.

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Swedish krona falls on Baltic exposure
Financial Times, October 16 2008

Traders said talk that several large funds had unwound their exposure to Sweden exacerbated the move, while a greater than expected rise in Swedish unemployment also weighed on the currency.
David Deddouche, at Société Générale, said the likely reason for the krona’s fall from grace was concern over the exposure of Swedish banks to the Baltic states.

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