LATVIA / SWEDISH BANKS
The link between the fate of Latvia and the stock price of Sweden’s major banks became even more apparent this week. On Monday, Latvia’s government announced that it had rejected a bailout deal with the IMF, spurring new concerns of devaluation.
In response, investors sold off shares of Sweden’s Swedbank to the tune of a 5% decline. The market sees these two parties as inextricably linked: as Latvia goes, so goes Swedbank.
We also learned that over 50% of Swedbank’s Latvian mortgages are under water, i.e. the value of the home is worth significantly less than the principal balance that the bank has loaned against it.
When this happened in the United States, default rates skyrocketed. I don’t see how this won’t happen in Latvia, especially given risk (certainty) that the country will devalue its currency.
Let me know if you disagree, I would love to debate the analysis.
LITHUANIA
In a related story that shows interesting promise, the government of neighboring Lithuania announced that its economy contracted by a whopping 24% rate from last year. Twenty-four. Not a type-o.
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2009-07-31
