Latvia’s Splattered Euro Spin
Although less than half the population supported entry and the government fell apart just prior to the transition to atone for a tragic building collapse, Latvia officially became the euro’s 18th member in January capping a positive year for Baltic stock markets as Lithuania may be next in the single-currency queue. Remaining lats in the banking system were converted smoothly to EUR 8.5 billion, but the switch was spoiled by heightened international scrutiny of alleged money laundering by 20 institutions handling mainly non-resident accounts which jumped over 15 percent in early 2013 as Russian and Ukrainian depositors fled Cyprus. The local regulator after a hands-off stance recently imposed a fine for control violations associated with Russia’s Magnitsky case, where former Yukos Oil company funds were funneled out of the country under murky circumstances never clarified with the holiday season pardon and release of jailed ex-CEO Khordokhovsky. Watchdog group Global Witness has also tracked a portion of $10 billion in offshore money to illegal actions in Cote d’Ivoire and Kyrgyzstan, and US authorities have penalized big multinational lenders for infractions, with JP Morgan just suspending Riga correspondent relationships. Officials have told the EU disclosure and tax practices could soon change while maintaining the center’s confidentiality reputation. They are spooked by the prospect of a Cyprus-like panic as almost half of deposits were lost since the crisis there broke a year ago. The surviving biggest bank recorded another loss in the latest quarter with a 50 percent NPL ratio. Spending was cut 10 percent in the new budget with debt/GDP at 125 percent and deep recession predicted indefinitely. Capital controls are still in place with tourism off 3 percent in 2013. Slovenia avoided a similar fate by organizing its own banking rescue through a central asset management agency that will absorb over EUR 3 billion in bad credit, as its 10-year benchmark bond yield dropped to 5.5 percent on a successful private placement and parliamentary no-confidence motion defeat. The beer monopoly Lasko is on the block and privatization has sparked MSCI frontier interest as equities were up 20 percent last year.
A December IMF study and conference focused on the separate risks from Nordic-Baltic financial sector integration with pronounced oversight gaps from cross-border banking group and stock exchange consolidation. Memoranda of understanding exist but are untested in practice and safety net schemes like deposit insurance “differ widely,” according to the document. Insurance, pension, leasing and securities products are increasingly linked through complex conglomerates and regional banking systems are highly concentrated. Household and mortgage business has expanded rapidly through Baltic universal providers drawing on Scandinavian parent capacity led by Nordea and SEB with their sweeping networks. Nordic ownership of banks in Estonia, Latvia and Lithuania has promoted post-crisis confidence with liquidity and technology infusion but contagion potential as well should a Swedish lender freeze cause skids, the review cautions.
