Saturday, October 17, 2009

Latvia Goes "No Bid"

By Steve Goldstein
Wednesday, October 7, 2009

LONDON -- It's never good news when a government bond auction fails. It's particularly bad news when an auction fails for a note maturing in just six months. And it's really bad news when there isn't any bid at all.

Yet that's what happened Wednesday when Latvia tried to sell close to $17 million of paper. It's not hard to figure out why.

The Baltic country is squabbling with Western -- mostly Swedish -- leaders over spending cuts, and it's a very real possibility that the country may be forced to devalue its euro-pegged currency if emergency global funds don't arrive.

Latvia, like Baltic neighbors Estonia and Lithuania, were republics of the Soviet Union from 1940 to 1991.

Were Latvia to devalue, that would hit economies in neighboring countries like Lithuania, and Swedish banks would rack up additional losses on the loans they have made throughout the region.

The real nightmare scenario would be the Swedish banks then pulling down other European banks, and then triggering Credit Crunch: Part 2.

There is, of course, a long way before that unwieldy scenario comes to pass. Latvia hasn't devalued -- yet - and, even if it does, that doesn't mean it would drag the Swedish banks under.

Lenders like Swedbank -- which has more branches in the Baltic countries and Ukraine than in Sweden -- have endured plenty of losses, and Swedbank, for one, just raised more than $2 billion to weather stormier times. See earlier story.

Still, investors might recall a minor matter involving teaser loans that only took down the entire world economy.

Not every domino falls. But there's one that's looking shaky.

Steve Goldstein is MarketWatch's London bureau chief.

For further reading:
"Latvia could cope with controlled devaluation", Reuters, October 16, 2009
"Lessons of the lat", The Economist, October 15, 2009
"Latvia's Woes Rise as Auction Fails", Wall Street Journal, October 8, 2009

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